US dollar's global safe-haven standing could be slipping

The US dollar's role as the chief currency to hedge against stretches of market turbulence may be under more scrutiny than it has been in decades.

The US dollar index, which tracks the dollar against a basket of its currency peers, is down about 12% from its peak in January 2025, shortly before President Donald Trump's second term began. In late January this year, it hit its lowest point since February 2022.

Tariff uncertainty, geopolitical instability, soaring government debt and challenges to the Federal Reserve's independence have diluted the dollar's safe-haven status, boosting the risk of higher borrowing costs and further straining the US economy, according to foreign exchange strategists.

"There is strong evidence that the market is questioning and doubting the US dollar's safe-haven status," Jane Foley, head of foreign exchange research at Rabobank, said in an interview.

While the dollar's decline could signal its loss of position as the world's safe-haven currency, it could also be due in part to a "huge wave" of position adjustments as investors have shifted away from the "buy America" trade, Foley said.

"The US dollar can still boost strong liquidity, reserve currency status, and it is linked to a country that has hard power and global influence," Foley said. "To restore the dollar's safe-haven status fully, fiscally prudent policies and a credible and independent central bank would be major considerations. Less political surprises and uncertainty would be helpful."

Certain investors, particularly those in Russia, China, and other military and trade rivals to the US, may already see alternatives to the dollar as more appealing, Matthew Weller, global head of research at FOREX.com, told S&P Global Market Intelligence. Investors may be looking to the Swiss franc or even the euro as better safe-haven assets at the moment, Weller said.

"The US dollar remains the premier safe haven across global markets, but for the first time in a long time, there are reasons to question whether that position is unassailable," Weller said.

Significant moves down for the dollar have been precipitated by tariff announcements from the White House, foreign policy actions in Venezuela, Greenland and Iran, and legal attempts to weaken the Fed's independence, according to Lee Hardman, a senior currency economist at MUFG.

"While these developments have not triggered sustained selling of US assets by foreign investors, they are likely encouraging foreign investors to diversify their exposure away from the US and/or increase foreign exchange hedging of US asset holdings," Hardman said in an interview.

The dollar may continue to inch lower until investors are confident that "more predictable and orthodox" US policymaking is underway, Hardman said. Absent that, though, a sustained loss of confidence in the dollar could destabilize US financial markets and a broader economy heavily reliant on foreign savings, push up the US government's deficit-financing costs, tighten fiscal policy and slow growth, Hardman said.

Haven appeal

Restoring the safe-haven appeal of the dollar would hinge on creating more stable trade policy, restoring perceptions of Fed independence and increasing fiscal responsibility to reduce longer-term uncertainty, Daniela Hathorn, senior market analyst at Capital.com, said in an interview.

Without this, the dollar is likely to weaken further, with sustained dollar rallies potentially more difficult as flows move to safe-haven alternatives, as seen in the recent steep rise in gold prices, which has the precious metal acting as a longer-term hedge against institutional and policy uncertainty, Hathorn said.

"The longer-term risks lie in the fact that markets may conclude that US policy is structurally more volatile, especially around trade, fiscal trajectory and central bank independence, which may have a more durable effect on eroding the haven premium," Hathorn said.

However, if the dollar's safe-haven status continues to wobble, investors may have difficulty finding an acceptable alternative.

"The reality is, whatever you think of the US dollar, it's still by far and away the only option when it comes to a global reserve currency," Michael Hewson, an independent market analyst, said in an interview.

Foley with Rabobank said any safe-haven currency would need to be linked to a country with low debt, a good budget position, a credible legal system and institutions, and ample liquidity. The Swiss franc is arguably the only true safe haven in these terms, according to Foley.

Still, the US dollar has "huge" liquidity, and the US maintains the ability to fund its debt without the market growing overly concerned about how much that debt continues to increase.

"It is impossible to replace the US dollar wholly because of its sheer size and reach," Foley said. "However, the market is being more careful about hedging dollar positions and is looking to currencies which have strong fiscal positions as diversification plays."