The dollar and US government bonds have been losing their appeal as safe-haven investment destinations of late. Instead, gold and alternative currencies, like the Swiss franc and Japanese yen, have become preferred sanctuaries for investors looking to shelter from the economic fallout from Cobvid-19.
Historically low interest rates are not helping the dollar’s cause, as investors seek better yields elsewhere – and are finding them in emerging markets. Right now, the risk-return dynamics seem to be erring on the side of the other safe havens instead of US assets, with emerging markets benefiting from the side currents.
He adds that although the US dollar “remains the undisputed global reserve currency”, it is more telling what investors actually do in a crisis. He points out that after the 9/11 attacks, the Madrid bombings, the Lehman collapse, the eurozone crisis and the Brussels bombings, traders and investors bought Japanese yen instead of other currencies, including the dollar. He believes the March 2020 market crash confirmed that the yen is still “the safe-haven currency par excellence”.
The guidance given after the July Fed meeting is expected to reinforce the lower-for-longer positioning of the Fed. However, it is not expected to reveal any significant change in monetary policy stance until its September meeting. Another factor that could sustain the weakness in the months to come is political uncertainty ahead of the presidential election in November.notes that, along with being a commodity, gold also functions as a currency.
At the surface, it may seem counterintuitive that emerging markets could benefit at a time when most developing countries face considerable economic challenges as a result of the pandemic. Perhaps the headline of aarticle in May, “The Markets are not the Economy”, captures it best and, as such, investment flows at times bear no relation to fundamental economic realities.