The US dollar’s status as a global safe haven faces challenges due to increasing budget deficits and trade tensions. Traditional safe havens like the Swiss franc and Japanese yen are showing improvement, indicating a retreat from US assets.
Rising borrowing costs for the US Treasury may raise concerns about the budget deficit, which was 6.4% of GDP last year. The dollar’s appeal is being affected by fears around corporate America’s growth outlook and the impact of tariff news.
Improvement of Swiss Franc and Japanese Yen
While the dollar has failed to act as a safe haven, the franc and yen have performed as expected, buoyed by their association with current account surplus countries. Investors tend to repatriate funds during uncertain times, enhancing the strength of these currencies.
This shift points to broader concerns around the sustainability of US financial stability. Traders have begun adjusting positions, seemingly preferring assets tied to more fiscally prudent economies. With Washington’s borrowing requirement rising alongside interest rates, investors appear less willing to fund what is increasingly viewed as a deteriorating fiscal balance. The budget shortfall, already at 6.4% of GDP, restricts Washington’s room to manoeuvre—an issue that markets can no longer look past.
The inability of the greenback to find persistent support during moments of market stress hints at deeper fragility. When tariffs dominate headlines, equity volatility rises, yet flows do not instinctively return to the dollar. Instead, we are observing the opposite. The Swiss franc and Japanese yen have quietly attracted capital. This isn’t a coincidence. These countries have current account surpluses and relatively sound fiscal positions. Investors retreat to such environments when external conditions change rapidly. It’s not simply preference—it’s habit, experience, and often necessity.
Now, with volatility potentially picking up in other asset classes as well, we should be considering how defensive flows may develop from here. Options activity linked to these safer currencies has started to increase, particularly in tenor buckets inside three months. This may reflect short-term hedging demand. If that continues or broadens to speculative positioning, we may see higher realised volatility in crosses involving safe haven currencies—which can trickle into FX-linked volatility surfaces across regional pairs.
Impact on Us Financial Stability
We are watching US rates spreads closely. OIS forwards suggest that the market continues to price in persistently tight monetary policy, even amid rising press coverage focused on credit concerns. That combination creates stress points, particularly for funding-sensitive trades that rely on carry. Traders navigating short-dated exposures linked to leveraged strategies may find this worth noting, especially if funding premiums reprice.
Equity-linked hedging dynamics further complicate matters. Derivatives desks have seen a pickup in skew premium for out-of-the-money puts, aligned with renewed demand for downside protection in US indices. We’re particularly monitoring how this shift may bleed into USD hedging via proxy trades, such as options on ETFs with international exposures. Such positioning can place unexpected directional pressure on currency markets in spot and vol.
Some strategies relying on assumptions of dollar resilience under pressure now look poorly timed. Yield-seeking flows have paused, which historically were supportive of the greenback. This time they’re heading elsewhere. The question moves from flow size to flow velocity—how fast risk can rotate. From our side, we’re watching both the intent and the timing of hedging flows. Volatility surfaces are shifting accordingly.
We cannot ignore positioning offsets either. Speculators who are still net long USD may find themselves exposed if sentiment turns further; a moderate retracement here could create feedback loops into margin calls or forced unwind scenarios. Given the present context of tighter global dollar liquidity, such a scenario is not remote.
For near-term derivatives exposure, currency tail hedges that go beyond correlation-based assumptions may provide a buffer. It might make sense to consider structures that benefit from both volatility spikes and directional movement in favour of surplus economies. What we’re seeing, both in price action and in derivatives volumes, suggests a theme building—not yet locked-in, but no longer ignorable either.
