Investors fleeing risk pick the U.S. dollar as safe haven

08/15/2011 9:15 am EST


Jim Jubak

Founder and Editor,

At the moment U.S. Treasuries are the safe haven of choice.

And so, strange as it may seem, is the U.S. dollar.

Let’s take the currency piece of this first. The U.S. dollar is up against strong currencies such as the Canadian and Australian dollar, and the Swiss franc. The logic on the Canadian and Australian currencies is that a slowing global economy will hurt these commodity-exporting economies enough to end any prospect of interest rate increases. In the case of the Swiss franc the concern seems to be that the Swiss central bank has decided to intervene to weaken the currency in order to save the country’s exporters from further pain.

The dollar is still expected to decline by the end of the year with Wall Street investment strategists surveyed by Bloomberg predicting a 1% decline in the currency in the fourth quarter. But that’s a huge shift from the results of Bloomberg’s July 12 survey when strategists were projecting a 2% decline.

In the bond market, U.S. Treasuries remain the favorite bet of investors fleeing volatility in global financial markets. The Federal Reserve’s promise last week to keep interest rates at their current extraordinarily low levels through 2013 was an open invitation to use Treasuries as a shelter from risk. After all, the Fed’s statement removed any risk to Treasuries from an increase in interest rates.

Last week Treasury prices rose and yields on the 10-year Treasury fell to a record low of 2.0346% on August 9. Even the U.S. Treasury’s auction of $72 billion in notes and bonds wasn’t enough to move yields significantly higher.

The next event that has the power to change the balance in the currency and bond markets is the Tuesday, August 16, meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel. Topic A, B and C will be how to stabilize the euro and European financial markets. Last week France, Spain, Italy, and Belgium all imposed bans on short selling. Such a ban smacks of panic and while the markets may welcome any stability the move brought to shares of hard-hit European banks, investors are now looking for some assurance that the ban is only a temporary measure set to be replaced by a long-term plan for the euro.

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