Dollar outshining gold, beating yen in battle of safe havens

Volatility across asset markets is fueling a bounce in the battered dollar, showcasing the currency’s safe-haven status amid worries over growth abroad and U.S. political strife.

The buck is up nearly 2% in September as of Tuesday against a basket of currencies, on track for its best monthly gain in 14 months and outpacing the performance of many other traditional destinations for nervous investors in what has been a turbulent period for stocks.

Gold, for example, is down nearly 4% in September, while the S&P 500 utility sector is little changed, and the Japanese yen is flat. Yields on the 10-year U.S. Treasury notes, which move opposite to prices, started the month at 0.67% and last traded at around 0.64%. The S&P 500 is off nearly 5% in the same period.

Several catalysts are stoking the dollar’s rebound, which has put the greenback at its highest level since late July. The U.S. currency’s 8% decline from its highs in March has left it looking comparatively cheaper than assets like gold, which stood at all-time highs last month. The yen’s haven status, meanwhile, may have suffered in the wake of a pandemic-era collapse in global rates.

“The dollar’s resurgence has … to do with the response of the capital markets to the global wave of de-risking,” said Thanos Bardas, managing director and co-head of global investment-grade fixed income at Neuberger Berman.

At the same time, many of the factors that made the dollar less attractive in recent months appear to be dissipating. COVID-19 cases are accelerating in Europe, threatening expectations of growth that boosted the euro, while worries over a hard Brexit have weighed on the British pound.

Additionally, speculation over the possibilities of negative interest rates in the UK and Australia have dimmed the allure of those currencies to some investors, although such a move seems far off. In the United States, uncertainty stemming from the Nov. 3 presidential election and the shrinking likelihood of lawmakers agreeing on a fiscal stimulus package this year have fueled haven demand.

Bardas said Neuberger added to bets that the dollar will rise against the euro, a currency he believes is overvalued after a 10% run since March.

Chester Ntonifor, foreign exchange strategist at BCA Research, said spikes in equity market volatility have tended to boost the U.S. currency, as does turbulence in foreign exchange markets after long periods of placid trading.

Broader currency market volatility, as measured by Deutsche Bank, shot up to 8.4 on Tuesday, from 5.93 in late July.

The dollar index has risen by an average of roughly 2% in the two most recent upsurges of volatility.

Others see the rally as a chance to take profit on the dollar or place bets against the currency, believing it will resume weakening once markets grow calmer.

“I have been a dollar bull. But I am using this opportunity to sell dollars when everybody is buying,” said Momtchil Pojarliev, head of currencies at BNP Asset Management, who is selling dollars to buy yen.

The dollar’s rally received a tailwind from a “nasty short squeeze,” as investors betting on a weaker U.S. currency were forced to unwind their bets in recent weeks, said Paresh Upadhyaya, director of currency strategy and portfolio manager at Amundi Pioneer Asset Management.

The possibility of further positioning unwinds remains – net bets on a weaker dollar in futures markets stood at $33.6 billion in the latest week, data from the Commodity Futures Trading Commission showed, near a nine-year high.

But Upadhyaya has added to his fund’s anti-dollar bets by buying the euro and Czech koruna.

“This is a healthy correction that is needed to ensure that a further depreciation in the dollar has legs,” he said.