The Dollar as a Safe Haven

When equity markets are under selling pressure, as they have been this week, capital tries to find safe haven investments to flee to until the selling pressure eases. Over the last few years, and especially during the credit crisis of 2008, the safe haven for capital usually was the US dollar and US Treasury bonds. As the equity markets fall the price of Treasury bonds and the dollar rise because they are viewed as conservative or safe places to protect money. The chart below of the S&P 500 and the dollar demonstrates this relationship.

The S&P 500 is the white line in the chart using the right scale, and the US dollar is the orange line using the left scale. Dollar rallies (shown as green trend lines) and S&P 500 sell-offs (shown as violet trend lines) occur coincidently in time. Also, dollar sell-offs (shown as red trend lines) and S&P 500 rallies (shown as blue trend lines) exhibit this same relationship.

However, the last few days have created an interesting divergence in this relationship, as shown in the boxes at the far right of the chart. The S&P 500 has been falling but so has the US dollar. A few days do not make a trend (or in this case a relationship change) and we would expect the dollar to rally if the selling pressure continues. If this relationship does change, it will be very telling that the market no longer views the dollar as a safe haven play. I wonder if the Federal Reserve would see this as a sign to reassess the effect that Quantitative Easing has on our currency.