Why is the Dollar Finding A Safe Haven Bid?

The jasmine revolutions in MENA and euro-era high yields on the peripheral of Europe failed to give the US dollar a safe haven bid. And yet today, it is difficult to deny the greenback is benefitting from the broader risk aversion.

Previously I explained the lack of dollar safe haven bid by noting that it was precisely because US Treasuries were a safe haven, that the dollar was not, in the sense that 1) the market was particular sensitive to the divergence of monetary policy and 2) the interest rate spread between the US and Germany widened. Now while US Treasuries have rallied, German bunds have rallied more so. The 2-year interest rate differential has moved 7 bp in the US favor today and now stands at 97 bp the lowest since before the March 3 ECB meeting in which signalled a near-term rate hike.

Separately, but related to this, the Japan's earthquake, tsunami and the nuclear accident is a negative shock to the world economy. It is too early to know the extent. Those countries that were engaged in tightening or about to, may have to reconsider. This may also encourage selling of the euro, the Swedish krona, sterling and the Australian and Canadian dollars.

Previously I noted that the rally in oil prices sparked more talk of the recycling of petrodollars as producers maintained the currency allocation of their reserves. Oil prices have come off and there is less talk about petrodollar recycling.

Lastly, I note market positioning. Judging from the IMM data and proprietary information, it appears the market had amassed a large short dollar position. The shock that has swept over the markets is encouraging a movement to the sidelines--selling what one had bought and buying back what one had sold.