The U.S. dollar has traditionally been seen as a safe haven asset. When turmoil grips the financial markets, money usually flows into dollar-denominated assets. Even when the United States is the source of that turmoil–as it is now thanks to the global trade war set off by the Trump tariffs.
But that’s not what’s happening now. Hot money has poured into gold, the Japanese yen, European stocks—-almost anywhere but the greenback
“It’s unusual and very telling,” John Sidawi, a fund manager at Federated Hermes, told Bloomberg. “The dollar, in an environment where it should be acting like a safe haven, is not.”
The dollar has dropped against all but a handful of the 31 major currencies over the last three months, sending Bloomberg’s dollar index down nearly 3%, its worst start to a year since 2017. The price of gold–a rival safe haven –has surged to a record high of over $3,000 an ounce. By mid-March, speculative traders started betting against the dollar for the first time since Trump’s election amid fear his policy shifts could drive the world’s largest economy into a recession.
And President Donald Trump’s trade policies are reviving discussions about whether overseas governments will accelerate efforts to lessen reliance on the dollar. In Europe, leaders have seen it as an opportunity to strengthen the euro’s role by creating more integrated, liquid markets that would allow the common currency to better rival the dollar. In the developing world, a handful of countries have also periodically floated the idea of banding together to challenge the dollar’s supremacy.
In a note to clients Thursday, Jane Foley, a strategist in London for Rabobank, said Trump’s trade policies, pullback from military alliances, and casual talk of taking over Canada or Greenland “could accelerate the trend to de-dollarise and undermine the value” of the U.S. currency. At Deutsche Bank, George Saravelos, the global head of FX strategy, warned clients this month that the chance of the dollar losing its safe-haven status as markets adjust to a new geopolitical order “needs to be acknowledged as a possibility.”
I added the Invesco DB U.S. Dollar Index Bullish Fund ETF (UUP) to my Perfect 5 ETF Portfolio back on January 17,2025 exactly in anticipation of the dollar’s strength as a safe haven on the turmoil I thought the Trump tariffs would unleash.
I got the turmoil, but I didn’t get the dollar’s strength. The ETF is down 11% from that pick as of the close on March 28.
It’s hard to find an alternative asset to recommend. The tariffs the White House will announce on April 2 and the rounds that I expect to see announced after that will hit every developed and most developing economies hard. It will be hard for a currency to rally if its home economy is slowing. And it certainly won’t be easy for any central bank to strengthen its currency be raising interest rates in an economic slowdown.
The two obvious alternatives to the dollar are the euro and the yen. Both are deep markets with the kind of ample liquidity that money managers find reassuring right now.
Both economies will get hit hard by the Trump tariffs.
The European Central Bank was in an interest rate cutting mode before the tariff war really ramped up as it attempted to head off an economic slowdown in the bloc. I don’t see any interest rate increases now that would help the euro. Germany has recently passed legislation that will permit more borrowing for defense spending. That will help the German economy but it won’t be enough to make up for problems in the export sectors.
The Bank of Japan was raising interest rates before the trade war broke out. Forecasts were calling for another 25 basis point increase later in 2025 to fight inflation. That’s still possible although the bank will be very cautious about raising rates with Japan’s export sectors about to get hammered.
I think the possibility of an interest rate increase or the likelihood that the Bank of Japan will stay neutral on rates–plus the depth and liquidity of the yen market–make the yen the best currency alternative in a situation where there really isn’t a great pick.
On Monday, March 31, I will sell the Invesco DB U.S. Dollar Index Bullish Fund ETF (UUP) out of the Perfect 5 ETF Portfolio and replace it with the Invesco CurrencyShares Japanese Yen ETF (FXY). I will leave the portfolio weighting at 25%. The yen ETF is up 5.32% in the last three months as of the close on March 28. It charges a 0.40% expense ratio. There is no dividend.
