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The Comeback of the USD – Will It Last?

September 25, 2020 By Mircea Vasiu

In times of economic and financial crisis, investors seek refuge in safe-haven assets. They buy gold, silver, Bitcoin, etc., in the hope that their alternative investments offer protection to the portfolio. 

In the long run, they may get the diversification benefits they look after. But in the short run, the focus should not be on alternatives – but on what the alternatives compare with. More precisely, the USD.

USD Shows Why It Is In No Danger of Losing Its Reserve Currency Status

Gold made a new all-time high this year. It rose above $2,000 for the first time in its long history. Silver tripled in the course of a quarter. Bitcoin regained the lost ground in March and soared over $12,000.

What do they all have in common? The world’s reserve currency – the USD.

As the Fed printed more and more and made dollars available for all central banks in need (e.g., Fed still had dollar swap lines open since April), the dollar liquidity improved. Hence, the currency declined.

This is where it becomes interesting. The dollar took a beat, as investors ran away from the dollar and bought other alternatives. Some even diversified in other fiat currencies, like the EUR, AUD, or GBP – they all rose sharply against the dollar.

However, in a risk-off environment, at least some of these alternatives should keep their value intact. Or, more or less be stable against the dollar. However, as we have seen in recent days, the dollar proves to be the only safe haven as stocks, treasuries, gold, silver – they all sold off.

In 2008, just before the Great Financial Crisis, gold reached a new all-time high. For the first time, it traded above $1,000. Many were quick to point out to the fact that gold will surge more as the crisis unfolded. But just the opposite happened. The first market reaction was to look for safety – it found it in the USD, despite the fact that the crisis originated in America.

What followed looks like a copy/paste scenario to what we see nowadays. The Fed eased, opened liquidity swap lines, and the dollar eased. Gold advanced and reached over $1,900 in 2011, only to ease back to $1,000 five years later.

It shows that gold indeed represents a store of value, but the USD, its counterparty, is the most sought-after asset in a crisis.