- The US dollar emerged as the last remaining safe haven standing amid the war in Iran. However, this situation is increasingly conditional and regime-dependent. Since the outbreak of hostilities in Iran, only the US dollar provided genuine safe haven protection for global equities. Interestingly, gold, the Swiss franc, the Japanese yen and government bonds all failed to deliver. This dollar safety is not an anomaly but a pattern: the same dynamic played out during the Ukraine war in 2022, when inflation concerns overrode traditional flight-to-safety mechanics toward safe government bonds. Geopolitical shocks that carry inflationary consequences now systematically undermine the hedging properties of assets that once defined crisis protection. Yet, while the greenback still appreciates during acute liquidity crises, its correlation with broader risk-off behavior has weakened materially over the past decade. The resilience of the dollar is tied less to investor flight-to-quality and more to its structural role in global funding markets. When dollar liquidity dries up, the currency strengthens mechanically. This distinction matters: the dollar protects against funding stress, not against all forms of market turmoil.
- Against this backdrop, the era of a single global safe asset may be coming to an end. Firstly, true safe assets have become regional. Secondly, central banks across the world have accelerated their diversification away from a single reserve asset class and currency. Currently, no single asset offers simultaneous protection against both equity drawdowns and funding dislocations. US Treasuries come closest, but their safety derives from Federal Reserve backstops, not intrinsic properties. German Bunds and Japanese government bonds hedge domestic risks effectively but offer little protection against dollar funding stress. Safety has become a function of base currency: each bond market protects primarily against shocks within its own central bank's perimeter. In the meantime, the diversification away from the US has accelerated, if we consider the allocations of central banks to be a precursor to wider rebalancing. For a third consecutive year, central banks purchased over 1,000 tons of gold in 2024. By mid-2025, the market value of the gold they held surpassed their US Treasury holdings for the first time since 1996. The euro is emerging as the preferred currency alternative: 16% of central banks are planning to increase allocations; since 2021, the percentage of non-traditional reserve currencies in global reserves has doubled to 20%.
- Post-war, beware of strong(er) currency and government bonds volatility as the unipolar monetary order fractures without a clear successor. Twin deficits and policy radicality have eroded the role of the US as supplier of global reserve assets. In the meantime China continues to fears financial liberalization risks, keeping Chinese bond markets secluded. As for Europe, without the fiscal integration required for credible safe asset provision, its relative attractiveness remains limited. The geopolitical fractures in the currency world assumes a weakening of the US dollar viz. surplus economies such as the Eurozone, Japan, South Korean, Singapore, the offshore Chinese renminbi market and commodity exporters including Australia, Brazil, Canada and South Africa. As for safe assets, structurally higher and more volatile interest rates are to be expected as the convenience yield erodes in countries running unsustainable deficits. This will pressure equity markets and increase the likelihood and severity of sharp, liquidity-driven market squeezes. Gold could continue to serve as a transitional hedge during this shift.