Market Extra: Like it or not, the U.S. dollar is cementing its role as a global safe haven

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Good as gold? When it comes to havens, the U.S. dollar might be better.

That’s what some analysts said as the dollar rallied versus major rivals over the past week, appearing to benefit from a desire for safe assets despite the fact that jitters are homegrown in the form of impeachment proceedings against President Donald Trump and a related whistleblower investigation.

“The initial flow into the dollar has been a flight to safety rather than an acknowledgment of higher U.S. political uncertainty,” said Jasper Lawler, head of research at London Capital Group, in a note.

The ICE U.S. Dollar Index DXY, +0.26%, a measure of the U.S. currency against a basket of six major rivals, was flat Friday at 99.091, after nearing a 16-month high set earlier this month. The index is on track for a 0.6% weekly rise and is up more than 3% for the year so far.

Dollar moves have implications across markets. A stronger dollar can be bad news for U.S. exporters, making their goods more expensive in foreign markets. It can also weigh on prices of commodities because it makes them more expensive for buyers in other currencies.

It can also be a problem for emerging markets if a rising dollar draws capital flows away from them. It can also make it harder for borrowers in emerging markets economies to service dollar-denominated debt.

Meanwhile, U.S. stocks were on track for a weekly loss, with the S&P 500 SPX, -0.53%  off 1.2% for the week and the Dow Jones Industrial Average DJIA, -0.26%  declining 0.6%, turning down Friday after Bloomberg reported that the Trump administration was weighing a plan to curb U.S. portfolio flows to China and potentially delist shares of Chinese companies on U.S. exchanges.

Gains for gold, which remains up around 17% so far in 2019, have been widely attributed to the metal’s traditional role as a haven, with much of the rally coming during periods of escalating trade tensions between the U.S. and China which has slowed global economic growth. But Lawler argued that gold’s pullback this week showed that its rally hadn’t been about haven flows but was inspired by a desire for protection against currency devaluation.

The dollar’s haven appeal has been on the rise for a while.

“At least since early 2018 it is clear that the USD (U.S. dollar) is performing as a safe haven for a large number of investors. This is despite the fact that the U.S. has poor budget and current account positions,” said Jane Foley, senior FX strategist at Rabobank, in a note.

Foley tied the strength in part to the dollar’s dominance in the global payments system, with world-wide demand for dollars rising substantially since the 2008 global financial crisis (see chart below).

“Since dollars have become more important to an increased number of people, it is not surprising that USD demand may increase with risk aversion,” she said.

That helps to explain why the dollar gets a boost in times of rising uncertainty even when it is the U.S. that is causing the uncertainty.

Indeed, Steve Barrow, head of G-10 strategy at Standard Bank, argued that Trump would be best served working to tamp down market-rattling rhetoric to achieve his oft-stated desire for a weaker U.S. dollar. He noted a rising correlation between economic policy uncertainty and a trade-weighted measure of the dollar.

“If the U.S. administration piped down about the dollar and unwelcome foreign trade and FX practices, we’d probably see global uncertainty and safe-haven demand fall, the dollar slide, rates rise and the current account improve,” Barrow said in a note earlier this week.

“Instead, the administration thinks that trade can be improved by tariffs, rates can be lowered by complaints about the Fed, and the dollar can be made more competitive by labeling others manipulators. Only one of these seems true,” he said.

The impeachment process under way in Washington D.C. isn’t under the administration’s control, but to the degree it raises uncertainty, the dollar is likely to strengthen, Foley said.

“Since the current impeachment process is likely to stumble in the Republican-held Senate, it is likely that the market will continue to focus more on the issue of U.S.-Sino trade wars in the coming weeks than the politics surrounding Trump and Biden,” she said. “The impeachment process may distract attention away from the normal business of government in the near-term. On balance, this is likely to increase risk appetite which could leave the USD well supported.”

This article was originally published on Sept. 27.