‘Buy America’ Returns As Haven Demand Fuels Dollar Upside

Participants remain laser-focused on geopolitical developments, as conflict in the Middle East continues, and the volume of news flow remains deafening. Amid this, one thing has become clear, in that the ‘bye America’ trade has become a ‘buy America’ one once again.

This is most obvious in the FX space, where the greenback has been the only real haven in town, which has in turn not only taken the dollar index (DXY) above its 200-day moving average, but also to its best levels of the year.

There are a few reasons why the buck has stood out as a place in which participants can seek shelter this week. At its core, however, there is perhaps a degree of ‘autopilot’ going on here, with participants having an almost reflex-like reaction to simply buy the buck in any times of true strife, as we’ve seen in so many instances of geopolitical risk in years gone by.

Coupled with this, other ‘traditional’ havens have little attraction in the current environment. In the FX world, for instance, the JPY finds itself out of favour with Japan a substantial energy importer, while the investors have been scared off from buying the Swissie amid various remarks from the SNB, noting their increased preparedness to intervene in the market if necessary.

Elsewhere, gold has traded more akin to a momentum-driven risk asset than a safe haven for the last six months or so, as messy position wash-outs at the end of January, and earlier this week, have helped to prove, even if bullion is likely to remain a ‘store of value’ over the longer-run. Govvies, finally, are the other obvious haven participants tend to reach for, though with the market reacting largely to a commodity price shock, which could in turn bring about another round of inflationary pressures, fixed income is rather undesirable.

Back to the buck, and there are idiosyncratic factors that also provide further support, and strengthen haven demand. The US remains home to the deepest, and most liquid, capital markets to be found anywhere in DM, while the DXY continues to demonstrate a negative correlation with risk assets, such as the S&P 500.

To be clear, none of this diminishes investors’ concerns that were present before the latest flare-up in geopolitical tensions – namely, the erosion of Fed independence, as well as increased policy volatility in Washington DC. That said, the desire to batten down the hatches amid such a broad distribution of potential geopolitical outcomes presently trumps either of those jitters.

Looking ahead, geopolitical developments will naturally remain a key driver of the greenback in the short-term. If conflict does indeed prove to be prolonged, and the resulting energy price shock proves sustained, the dollar is likely to remain a relative outperformer in the FX world, not only given that such an environment would lead to persistent haven demand, but also given the US’ status as a net energy exporter, thus lessening the detrimental macro impact of any such moves in the energy complex.

However, even in the event that the energy price shock fades quickly, and conflict soon ends – which we, of course, hope comes to pass – the dollar can still perform well. Were the volume of geopolitical noise to be dialled down, participants would likely re-focus on the underlying fundamental backdrop. Stateside, that remains a robust one, not only as economic growth remains on course to outpace that of DM peers, especially amid the positive fiscal impulse from last year’s One Big Beautiful Bill Act. Monetary tailwinds, from additional easing under a Warsh Fed later in the year, should further underpin that outperformance.