Seeking the Next Safe Haven
If trouble brews on U.S. debt payments or in Korea, the dollar may not be the refuge it once was
By Justin Lahart
When the world looks stormy, investors first reaction is to flock to the safety of American assets. But what will they do when the U.S. is where the tempest is brewing?
Maybe just flee to America, nonetheless.
The potential for U.S.-centric risks to rise in the weeks ahead is unfortunately not theoretical. When it reconvenes next month, Congress must in short order raise the U.S. debt limit or put the government at risk of not being able to pay what it owes. At the same time, there are a series of geopolitical risks, including the standoff with North Korea, that directly involve the U.S.
When they get nervous, investors typically buy Treasurys. The Treasury market is large, liquid and backstopped by the U.S. government, which historically made it a safe place to ride out trouble. Buying Treasurys means buying dollars so money that flows into them also flows into the greenback.
But if the trouble is in the U.S., it is easy to imagine that Treasurys and the dollar might not be so appealing. Say, for example, that internecine conflicts make it so House Republicans can’t raise the debt ceiling without Democrats’ help, and the process of trying to hash out a bipartisan agreement takes too long. If the U.S. government guarantee on Treasurys becomes suspect, investors could look for someplace safer for their cash.
Ray Dalio of Bridgewater Associates, the world’s biggest hedge fund, has suggested the best protection against the prospective risks from the debt ceiling negotiations and North Korea isn’t Treasurys or the dollar, but gold. “[I]f you don’t have 5%-10% of your assets in gold as a hedge, we’d suggest that you relook at this,” he wrote in a recent LinkedIn post.
Another option that wouldn’t have been on the table until recently is the euro. The euro counts as the world’s second most important currency, and euro-area financial markets are highly liquid. Plus, with Europe’s economy no longer as fragile as it was a couple of years ago, investors ought to be more comfortable stashing their money there.
Investors may still stick to their old scripts. During the debt ceiling imbroglio in the summer of 2011, when the S&P 500 fell 16% in just two weeks, the dollar gained ground against other currencies, and Treasury prices rose. Similarly, at the height of the 2008 financial crisis, investors flooded into Treasurys and the dollar, even though the U.S. was ground zero for the trouble. Habits can be hard to break.
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