Dollar Rare Winner in Global Downturn

As markets plummet and countries scramble to hold their economies together in the face of rising prices, the U.S. dollar is again proving to be a safe haven for investors.

On Sept. 21, the dollar reached a 20-year high against a basket of currencies like the euro and yen as tensions rose in the Russia-Ukraine war and the Federal Reserve announced its third-straight 75 basis point rate hike. While equity-based ETFs sink, those linked to the dollar are rising, due to the Fed starting its hiking cycle faster than central banks abroad. 

The Fed’s hawkish path has been great news for bullish dollar ETFs such as the Invesco DB U.S. Dollar Index Bullish Fund (UUP) and the WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU), both of which are long the dollar and short against a basket of currencies like the euro.  

Both have outperformed funds like the Invesco CurrencyShares Euro Trust (FXE), the WisdomTree Emerging Currency Strategy Fund (CEW) and the Invesco CurrencyShares Japanese Yen Trust (FXY). 

Source: ETF.com  

Other central banks followed the Fed’s lead and raised rates this week, some as much as 0.75%, sending markets into a tizzy. In the U.S., both the S&P 500 and the Nasdaq composite were down almost 2.3% during the trading day and headed for their fourth straight decline.  

The U.S. dollar index was up 1.6% this afternoon. Meanwhile, the British pound fell more than 3% against the dollar to less than $1.09 for the first time since 1985.  

As the global macroeconomic picture darkens, investors have flocked to cash alternatives and investment vehicles using the dollar. Volumes for USDU have spiked this month amid rate hikes, inflation and the Russia-Ukraine war.  

Source: Yahoo Finance  

While investors have been able to find a safe haven in the dollar at a time when safe investments appear to be nowhere in sight, analysts warn of potential downsides, including instability.  

Morgan Stanley Chief Investment Officer Lisa Shalett warned in a Sept. 12 note that the current environment reminds her of the 1997 Asian debt crisis and “the mounting trade imbalances that led to the 1985 Plaza Accord, in which the U.S. agreed to weaken the dollar to reduce those imbalances.” 

“Yet investors don’t seem to appreciate the risk,” she wrote. “To wit, market-positioning data shows investors around the world still favor the dollar and expect its strength to persist.” 

Contact Shubham Saharan at [email protected]