Is the dollar still a safe haven? Wall Street warns of a hidden vulnerability

The dollar has stayed stronger for longer than markets expected this year, driven by a resilient US economy, rising oil prices and a boom in AI investment. Yet analysts say the structure that once powered dollar strength — rising global demand for safe-haven assets — is losing its grip.

The Economist reported Monday (local time) that the dollar index (DXY), which measures the greenback against a basket of six major currencies, has risen 4% this year. That marks its highest level since President Donald Trump announced reciprocal tariffs last April — a move later struck down by the Supreme Court.

As recently as the end of last year, a weaker dollar was the consensus call. This year, however, the currency has moved in the opposite direction.

One key driver has been euro weakness pushing the dollar higher. According to Bloomberg and other outlets, the euro fell to $1.1161 per euro in Asian foreign exchange trading that day, its lowest level since May 2025. The euro has now declined for four consecutive weeks.

Growing concerns about political and fiscal instability in the eurozone have weighed on the single currency. Chris Turner, head of foreign exchange strategy at ING Bank, said the euro's decline against the dollar reflects "a growing risk premium on the euro due to fiscal deficits" in countries such as France, and warned the euro could slide further to $1.10.

Rising energy, transportation and production costs stemming from the Iran war have also worked in the dollar's favor. Higher oil prices driven by the conflict have ultimately proved a boon for the US petroleum industry. The Economist noted that while rising oil prices create a political burden for Donald Trump and the Republican Party, they are in fact a tailwind for the dollar.

A stronger-than-expected US economic expansion has been another pillar of dollar strength. On Sept. 30, the Commerce Department said the final reading of second-quarter GDP growth came in at 2.2% on an annualized basis, up 0.7 percentage points from the preliminary estimate of 1.5% and above the market consensus of 1.5%.

The possibility that the Federal Reserve could raise interest rates before year-end is also making US interest-bearing assets — including government bonds — more attractive to investors. Because foreign buyers must first convert their funds into dollars to purchase US stocks or bonds, demand for American assets translates directly into demand for the dollar.

In practice, foreign investors net purchased $450 billion in US corporate bonds over the past year, the largest amount in 20 years, The Economist said. They also snapped up $900 billion in US equities and funds — 80 percent above the previous peak set in 2021. The concentration of flows into risky assets has been particularly pronounced in dollar-denominated investments.

However, analysts say the foundation supporting the current dollar rally has narrowed compared with the past. Currency strategist Stephen Jen has described this phenomenon as the "dollar smile."

The Economist said "the dollar smile has now twisted into something closer to a smirk," arguing that what is propping up the dollar today is not safe-haven demand but rather investor appetite for risky US assets such as equities and corporate bonds.

"This means the dollar could come under pressure if the appeal of US assets fades," the magazine added. "In particular, if the AI investment boom proves to be a bubble and US equity markets correct, capital that flowed into the US chasing returns could exit quickly, pulling the dollar down with it."