You Need A Safe Haven, And The US Dollar Is Happy To Accommodate You

You Need A Safe Haven, And The US Dollar Is Happy To Accommodate You
Jonathan Hobbs

over 1 year ago2 mins

The US dollar was locked in a major downtrend between 1986 and the financial crisis of 2008. But it’s been on a superb run of form ever since then, climbing by around 50%. That much is clear from the US Dollar Index (DXY), which tracks the value of the greenback against six major currencies: the euro, British pound, Japanese yen, Canadian dollar, Swiss Franc, and Swedish Krona. The index has jumped almost 10% in the first half of this year, and just ended June well above its 2017 high.

It’s no surprise that the dollar is on such a rip right now: it’s a safe haven asset at a time when there’s no shortage of danger in the markets, after all. On top of that, the US Federal Reserve has been raising interest rates faster than most other countries’ central banks. Those relatively high yields have given investors even more incentive to park their cash in the world’s premier currency.

Of course, there are two caveats to keep in mind if you’re thinking of buying in. First, the chart above shows the long-term situation, with each bar representing six months’ worth of movement. That’s useful in that it cuts out the noise to reveal the long-term trend, but it also disguises the short-term pullbacks you’re likely to experience along the way. Second, the Federal Reserve might actually end up succeeding in bringing US inflation down, which would allow it to start slashing rates again. That would promptly make the safe haven currency look a lot less appealing.

Still, the overall trend of the index suggests the dollar is likely to keep climbing versus other currencies over the next few years, possibly to highs not seen since 2001. So if you’re looking for a relatively safe long-term bet, look no further than the bills in your wallet.

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