USD as a Safe Haven: Breaking Bad?
By: Jayati Bharadwaj, Mark McCormick
Apr. 23, 2025
The USD has had a tough quarter and the pickup in volatility and trade uncertainty has not been able to save it. We dig deeper into correlations of the USD with U.S. equities and rates and see a big drop. The dollar's positive relationship to cross-asset volatility indices has also collapsed recently. April has seen a pickup in global macro volatility and an outperformance of alternate safe havens (CHF, JPY, EUR) while the USD has plummeted. This brings into question the USD's appeal as a safety retreat.
Is the USD losing its safe haven appeal?
2m rolling correlation (1w rate of change) of USD to SPX and U.S. 10y
The U.S. is no longer exceptional as the gap with ROW converges
USD loses exceptionalism on multiple fronts
One reason for the loss of haven appeal is linked to the loss of U.S. exceptionalism. In fact, the country's growth advantage to the rest of the world has finally disappeared after two years. Also, U.S. equities have severely underperformed global equities and the USD has mirrored that. Looking at flows, you can see investors diverting money away from U.S. equities into European and Asian (ex-China) markets. A combination of all this has turned USD sentiment deeply negative in a short span of time.
Early signs of rotation away from U.S. into European equities
EPFR flows into equities from all funds
Europe and Asia outside of China see equity inflows
EPFR flows into equities from all funds
What's the view?
We wait for better entry levels to engage in a medium-term USD bearish view. We expect USD to weaken in 2025 as the gap between the U.S. and the rest of the world shrinks and rotation away from U.S. equities/USD to undervalued markets in Asia and Europe continues.
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