The US dollar has traditionally been a safe-haven asset, meaning whenever people are afraid, they sell ‘risky’ assets and flee to the safety of the US dollar. The same goes for US Treasuries.

Indeed, at the height of the global financial crisis (right after Lehman Brother’s bankruptcy in September 2008), both the US dollar and Treasuries surged. The Chicago Board Options Exchange Market Volatility Index (VIX) also spiked at that time. In uncertain times, the VIX is probably the purest measure of the market’s fear because it tracks expectations of volatility in US stocks.

Meanwhile, risky assets – those most susceptible to an economic downturn, like industrial commodities, junk bonds, small-cap stocks – plunged.

In the period after the zenith of this panic, the value of the US dollar, US Treasuries, and the VIX continued to strongly correlate with the resurgence of fear and uncertainty in the global financial markets.

However, starting the week of February 21, 2011, this pattern appears to have broken down.

The fear in this case is unrest and the threat of civil war in the oil-producing country of Libya.

The VIX index, as expected, has spiked; it currently trades at 21.32 compared to last week’s closing level of 16.43.

The US Dollar Index, however, is down from 77.66 last week to the current level of 77.12. The 10-year Treasury yield (inversely correlated with the price) is up only slightly, from 3.367 to 3.448.

A clear winner though, was crude oil, because Libya is a sizable oil exporter.

As far as currencies go, the Swiss franc seems to have taken the title of ‘safe-haven asset,’ as it rallied against both the US dollar (2 percent) and euro (1 percent) from last week’s closing level.

At this point, there is no clear explanation for the dollar and Treasury’s poor performance in this period of turmoil. Nevertheless, it’s clear that the ‘safe-haven’ US dollar trade isn’t happening right now, which may signal a fundamental shift in the market’s perception of the United States.

Email Hao Li at hao.li@ibtimes.com

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