On the Safe-haven Status of the US Dollar

Panel Participation

Notes

On the Safe-haven Status of the US Dollar Andrew Hauser * Deputy Governor 2026 US Monetary Policy Forum 7 March 2026 ( 6 March 2026, 1.30 pm EST )
– New York The phrase ‘safe haven’ – or safe harbour in Old Norse – conjures up
images of a peaceful idyll, far from the wilds of the open seas, furnishing comfort and replenishment for
the weary sailor. But the reality can be rather different – as Captain Cook found when, heading
home at the end of his famous voyage in 1770, he grounded his ship HMS Endeavour on the
Great Barrier Reef (Slide 2). 1 In mortal danger, the crew found a promising river
estuary – known as Waalumbaal Birri by the local Guugu Yimidhirr people – in which to conduct
repairs. But the winds were so fierce, and the water so crocodile-infested, that it took them another
week to stagger far enough inland to beach their leaking boat on a mudbank. 2 Defining a safe haven asset can be equally challenging. Market participants typically identify three main characteristics of such assets (Slide 3): security
(minimal credit risk); an inverse correlation with the value of risky assets; and liquidity. Those
characteristics are said to flow, in turn, from a raft of more fundamental drivers including: economic
stability; strong institutions; open markets for goods, services and capital; and deep financial
markets. 3 The relative weight placed on these considerations varies across time, and by investor mandate. But if
anything could have been said to meet these tests in recent decades, it is surely the US dollar.
Whether that status may now be under threat is a topic of lively discussion, in Australia and beyond. But
what does the evidence show? Let’s start with security – something all investors need (Graph 1). The cost of insuring
against a US default did pick up either side of ‘Liberation Day’ in April 2025,
and again to a lesser degree around the government shutdown. Moody’s also cut their US credit rating
from AAA in May 2025. But this only brought them into line with other rating agencies 4 – and
sovereign CDS spreads, though an imperfect proxy, have since fallen back to their longer term average. So
there is little sign yet of a persistent decline in perceived security. Graph 1 The dollar’s hedging properties matter most to return-seeking investors. The US dollar has
obviously not played what some claim to be its ‘usual’ role in key periods over the past 12–18 months – depreciating, rather than appreciating, in the face
of widespread uncertainty over US policy, and a sharp fall in equity prices last April. But in truth, the dollar has never been a perfect hedge for all risk-off events, appreciating
most persistently during periods of funding stress associated with strong demand for the currency (Graph
2 and Table 1). 5 As such,
fund managers have long understood that the optimal currency hedge for US equity holdings
switches frequently between dollar, yen, Swiss franc and other currencies, depending on the shock (Graph
3). 6 So while the
events of 2025 could be a sign that things have changed, what we saw was far from unique. It
is surely noteworthy that the dollar did appreciate following the recent attacks on Iran. Graph 2
Table 1: US dollar safe-haven correlations Event USD as a safe-haven hedge Great Financial Crisis (2008-2009) Yes European sovereign debt crisis (2011) Yes COVID-19 (March 2020) Yes Russia-Ukraine war (2022) Yes Iraq war (2003) No September 11 attacks (2001) No April 2025 tariff announcements No Graph 3 The feature that matters most for many, including us central bank reserves managers, is liquidity. The
pre-eminent role of the US dollar in cross-border payments and invoicing, banking claims and debt
issuance 7 has
long allowed US sovereign assets to command a liquidity premium (or ‘convenience yield’). On
some measures, that ‘specialness’ deteriorated in 2025 compared with earlier years, leading
some commentators to make the eye-catching claim that it may presage the end of the dollar as a reserve
currency. 8 Here too it is worth keeping our feet on the ground. The convenience yield is a slippery concept to
measure – but neither of the proxies shown on Graph 4 suggest anything particularly dramatic
happened last year relative to the longer term trends, which had been suggesting a declining
‘specialness’ for some years. Nonetheless, as a matter of sheer scale, US fx and treasuries
remain by far the most liquid of the ‘traditional’ safe haven markets (Graph 5).
The covid experience caused some to pose questions about the capacity of the US treasury market to trade
efficiently through periods of extreme stress. 9 But the market weathered recent turbulence well,
bolstered by confidence in the growing array of liquidity tools available from the Federal Reserve,
including the Standing Repo Facility, the Discount Window, the Foreign and International Monetary
Authorities (FIMA) repo facility and the standing swap lines. Graph 4 Graph 5 Having summarised how the dollar’s safe haven characteristics have (or haven’t) changed,
let’s look now at how market participants have responded. In aggregate, official reserves have diversified away from the US dollar, principally
towards gold and ‘non-traditional’ currencies, according to International Monetary Fund (IMF)
data (Graph 6). 10 And reserve managers told last year’s OMFIF
survey that that diversification could go further in the near term (Table 2), reporting geopolitics to
be their top long-term investment challenge. 11 Graph 6
Table 2: OMFIF survey: reserve managers' plan for currency exposure * % of respondents Increase Maintain Decrease EUR 23 +6 70 −3 7 −3 RMB 20 +7 73 −2 7 −5 JPY 11 +8 88 −2 2 −5 AUD 9 +6 89 −6 2 0 CAD 7 +7 91 −9 2 +2 GBP 13 +8 79 −9 8 +1 USD 20 −9 64 +4 16 +5 CHF 4 +4 95 −3 2 0 * Over the next 12–24 months; brackets indicate change from last survey. Source: Sanghani, N, A Sharan, A Correa and Y Aziz (2025), Global Public Investors Survey, OMFIF. But once again these are pretty glacial moves (Slide 11). The dollar remains close to half of all
reserves, similar to, or even a little higher, than in the early 1990s. Reserves managers still identify
it as by far the safest and most liquid of the major currencies, according to the OMFIF survey. And there
are a whole range of drivers behind the aggregate decline that do not reflect investment-based decisions
to diversify out of dollars, including: growth in reserves pools that are structurally biased towards
other currencies; decisions by some countries to shift part of their reserves pools to sovereign wealth
funds, state or policy banks; a forced response to sanctions; and valuation effects. 12 An unknown
amount of non-US dollar currency holdings may also be swapped back to dollars. Indeed, despite all the press stories and commentary about foreigners withdrawing capital from the United
States and seeking alternative homes elsewhere (including Australia), the data show that they remain
large buyers of US assets in net terms (Graph 7). Meanwhile, capital flows into Australia have so far
remained broadly similar to those seen in earlier years. (Graph 8) Graph 7 Graph 8 There has been one important change, however. Predominantly all the pick-up in portfolio capital inflows
into the United States over the past year reflects purchases of equity rather than debt (Graph 9).
And the huge valuation gains in US equity prices relative to debt in recent years have
dramatically changed the composition of US external liabilities, expressed as a share of nominal GDP
(Graph 10). Graph 9 Graph 10 This shift towards equity has at least two important implications. First, it means foreign investors, particularly in the private sector, may be keener to protect
themselves against signs of possible breakdown in what (rightly or wrongly) they see as the
dollar’s historical risk-off properties. It is hard to know how far this has so far gone,
because comprehensive data are not available. But some countries’ pension funds, including in
Denmark – the country of my fellow panellist – have reported increasing their hedge
ratios in 2025. Even Australian superannuation funds (which have historically relied heavily on the
Australian dollar’s inherent risk- on properties) have increased their cover very
slightly (Graph 11), with some funds saying they are likely to go further. 13 In as
well-reported analytical piece, Deutsche Bank identified a parallel pivot from unhedged to hedged ETF
inflows in 2025. 14 Ironically, of course, the very act of increasing
hedges may have played some part in driving the dollar down at times last year. 15 Graph 11 Second, the shift to equity suggests at least the possibility that we might be moving on from the
world of ‘exorbitant privilege’, in which the United States was able to run a persistent
current account deficit without running up a particularly large negative Net International Investment
Position (NIIP). The valuation differentials that enabled this – short low-yielding domestic
debt, long high-yielding overseas equities 16 – have more recently run into reverse,
contributing to a significant fall in the US NIIP (Graph 12). 17 Whether NIIP is a robust
indicator of a currency’s safe haven status is of course a hotly debated topic. 18 But the
role of the dollar and the future path of this variable seem likely to remain intimately linked. Graph 12 Before closing, I want to leave you with two reflections from the United Kingdom, my country of birth. The first is that even a temporary collapse in confidence in a safe haven asset, if significant in size,
can leave lasting scars. In October 2022, the Bank of England was able to staunch a run on gilts caused
by weaknesses in the business models of the Liability-Driven Investment (LDI) sector through a temporary
and targeted liquidity intervention. But the cost of this crisis was a borrowing cost premium that
arguably persists to this day (Graph 13). Graph 13 The second is more of a reflection on time. For a century, or thereabouts, the pound sterling was the
dominant global currency (Graph 14). 19 It is often thought that the dollar took over
decisively following the Second World War, as an impoverished United Kingdom passed the mantle to a
resurgent United States at Bretton Woods. But as Barry Eichengreen has reminded us, the truth is messier:
the dollar first overtook sterling as the leading reserve currency in the mid-1920s, but it lost that
status again following the devaluation of 1933. For much of the inter-war period, the two vied for
supremacy – and gold too played a key, if not always helpful, role. 20 The lesson of this period, if
there is one, is that change may come, not with a bang, but by degree, and with switchbacks along the
way. None of the developments I have covered today – the temporary fluctuations in default
probability, the shifts in correlations, the decline in the convenience yield, the shift in official
reserves, or the patchy pick-up in hedging – are anything like as dramatic as some of the headlines
would imply. But whether, like Captain Cook’s quest for safe harbour, they lead us ultimately back
to safety, or leave us stuck on the Barrier Reef, remains to be seen. Graph 14 With that, I look forward to our discussions today. Endnotes * I am deeply grateful
to George Tyler for his expert assistance in preparing these remarks, the slides and the analysis
that underpins them. I also thank Susan Black, Jason Griffin, Jacob Harris, Jarkko Jaaskela,
David Jacobs, Brad Jones, Jeremy Lawson, Jahan Mand, Tom van Florenstein Mulder and Morgan
Spearritt for their comments and suggestions on an earlier draft. 1 References are to the
accompanying slide pack . 2 See, for instance,
‘Captain Cook’s Epic Voyage: The Strange Quest for a Missing Continent’ by
Geoffrey Blainey. The image of HMS Endeavour on Slide 2 is from National Museum of
Australia, ‘A view of the Endeavour River on the coast of New Holland, by Ignaz Sebastian
Klauber, 1795’, Australia’s Defining Moments Digital Classroom. 3 Although these
foundations may seem somewhat obvious, researchers have struggled to find reliable empirical
evidence to support them. One of the few that does appears to be a country’s net overseas
asset position, a point I return to at the end of these remarks. 4 S&P cut from AAA
in 2011, and Fitch in 2023. 5 Adolfsen JF, AM
Grønlund and T Harr (2026), ‘The US Dollar: Not a Traditional Safe Haven’, CEPR,
29 January 6 I am grateful to
Stuart Simmons, head of Multi-Asset Solutions at Australia’s QIC, for the idea behind this
‘quilt’. 7 See Bertaut C, B von
Beschwitz and S Curcuru (2025), ‘The International Role of the U.S. Dollar – 2025
Edition’, FEDS Notes, 18 July. 8 See, for instance,
Jiang Z, A Krishnamurthy, H Lustig and RJ Richmond (2026), ‘Dollar Erosion: Understanding
the Loss of Reserve Currency Status’, 12 January; Atkeson A, J Heathcote and F Perri
(2025), ‘The End of Privilege: A Reexamination of the Net Foreign Asset Position of the
United States’, American Economic Review , 115(7), pp 2151–2206 ; Acharya VV and Laarits T (2025), ‘Tariff War
Shock and the Convenience Yield of US Treasuries – A Hedging Perspective’, December;
Du W, R Keerati and J Schreger (2025), ‘Decoupling Dollar and Treasury Privilege’,
October. 9 See, for instance,
Group of Thirty (2021), ‘U.S. Treasury Markets: Steps Toward Increased Resilience’,
Working Group on Treasury Market Liquidity; Duffie D (2025), ‘How US Treasuries Can Remain
the World’s Safe Haven’, Journal of Economic Perspectives , 39(2), pp 195–214 ; Liang N and H Zhu (2026), ‘Clearing the Path for
Treasury Market Resilience’, Brookings, 17 February; Kashyap AK, JC Stein, JL Wallen
and J Younger (2025), ‘Treasury Market Dysfunction and the Role of the Central Bank’,
Brookings Papers on Economic Activity, BPEA Conference Draft, 27–28 March. 10 IMF Data (2026),
‘Currency Composition of Official Foreign Exchange Reserves (COFER)’. 11 Sanghani N (2025),
‘Central Banks Turn to Gold over the Dollar’, OMFIF, 24 June. 12 For a fuller
discussion of these trends, see Goldberg LS and O Hannaoui (2026), ‘Drivers of Dollar Share
in Foreign Exchange Reserves’, NBER Working Paper 34888; Arslanalp S, B Eichengreen and C
Simpson-Bell (2024), ‘Dollar Dominance in the International Reserve System: An Update’,
IMF Blog, 11 June; Arslanalp S, B Eichengreen, and C Simpson-Bell (2022), ‘The Stealth
Erosion of Dollar Dominance: Active Diversifiers and the Rise of Nontraditional Reserve
Currencies’, IMF, WP/ 22/58 , March; Douglass P, LS Goldberg and
OZ Hannaoui (2024), ‘Taking Stock: Dollar Assets, Gold, and Official Foreign Exchange
Reserves’, Liberty Street Economics, 29 May; European Central Bank (2025), ‘The
International Role of the Euro’; Bertaut et al , n 7; Setser BW (2023),
‘China Isn’t Shifting Away From the Dollar or Dollar Bonds’, Council on Foreign
Relations, 3 October. 13 Murdoch S (2026),
‘Major Australian Pension Fund Trimming US Dollar Exposure on Weakening Outlook’,
Reuters, 20 January. For more on this topic, see Hauser A (2025), ‘ A Hedge Between Keeps Friendship Green: Could
Global Fragmentation Change the Way Australian Investors Think About Currency
Risk? ’, Remarks for a function hosted by CLS Bank International and NAB, Sydney,
16 September. 14 Smith I and E
Herbert, (2025), ‘Foreign Investors in US Assets Rush for Protection Against Swings in
Dollar’, Financial Times , 16 September. 15 Shin HS, P
Wooldridge and D Xia (2025), ‘US dollar’s Slide in April 2025: The Role of FX
Hedging’, BIS Bulletin , No 105. 16 Famously described
in Gourinchas P-O and H Rey (2014), ‘External Adjustment, Global Imbalances, Valuation
Effects’, in Gopinath G, E Helpman and K Rogoff (eds), Handbook of International
Economics , vol 4, North Holland, pp 585–645 . 17 See Atkeson et al , n 8 for a description of this shift. I am grateful to Lachlan Dynan
(Deutsche Bank) for the idea for the chart on Slide 15. 18 One paper arguing
in favour is Habib MM and L Stracca (2011), ‘Getting Beyond Carry Trade: What Makes a Safe
Haven Currency?’, ECB Working Paper Series No 1288. 19 See Vicquéry R
(2022), ‘The Rise and Fall of Global Currencies over Two Centuries’, Banque de France
Working Paper Series No 882. 20 For a detailed
discussion of this period, see Eichengreen B and M Flandreau (2008), ‘The Rise and Fall of
the Dollar, or When did the Dollar Replace Sterling as the Leading Reserve Currency?’. Underlying data This file contains all underlying data that are available for public release. Some graphs in this speech were generated using Mathematica.