Global Market | Safe-haven assets under pressure: Dollar, Swiss franc, German bonds and gold in focus

Demand for safe-haven assets has strengthened amid concerns over artificial intelligence (AI)-related volatility in technology stocks, the ongoing Iran war, elevated energy prices and mounting government debt. However, traditional havens have delivered mixed returns this year, highlighting the challenges investors face in protecting their portfolios during periods of market stress, Reuters reported.

Gold, which had surged to record highs, fell after the Iran war began as investors sold profitable holdings to cover losses elsewhere. Government bonds have also experienced significant volatility, with rising borrowing costs in major economies undermining their traditional appeal as defensive investments, Reuters reported.

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Against this backdrop, the US dollar, Swiss franc, German government bonds, short-dated debt and gold are emerging as potential sources of protection, although each faces distinct risks.

US dollar retains safe-haven appeal despite long-term concerns

The US dollar has recovered from last year's pressure to sell American assets, gaining around 4% since late February, when the Iran war began. Its resilience reflects its traditional safe-haven status, supported by the strength of the US economy, relatively high interest rates and the country's position as a major energy exporter, Reuters reported.

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However, concerns over US government debt, which has exceeded $40 trillion, and policy uncertainty continue to cloud the dollar's longer-term outlook. The currency could also face pressure if investors retreat from technology stocks, given the substantial capital inflows into US equities driven by enthusiasm for AI investments.

Societe Generale chief foreign exchange strategist Kit Juckes said the dollar could be approaching the later stages of its current bull market. Nevertheless, the ongoing energy crisis makes sustained bearish positioning difficult, Reuters reported.

The dollar's near-term performance is therefore likely to depend on the duration of the geopolitical crisis, energy prices and the direction of global capital flows.

Swiss franc gains as European risks mount

The Swiss franc has strengthened as concerns over European public finances and political uncertainty have increased demand for defensive currencies.

The franc has gained more than 2% against the euro this month, putting it on course for its strongest monthly advance since late 2023. Turmoil surrounding French government bonds, along with election-related uncertainty in France and Spain, has helped boost its appeal.

Georgette Boele, senior foreign exchange and oil strategist at ABN Amro, said concerns over France's public finances and political developments in Europe had supported the Swiss currency, Reuters reported.

The franc has also benefited from a shift in investor positioning. Traders have become less willing to use the low-yielding currency to finance carry trades, in which investors borrow in a low-interest-rate currency to invest in assets offering higher returns.

With Swiss interest rates at 0%, the franc remains a popular funding currency. However, growing market volatility and AI-related concerns could encourage investors to hold it as a defensive asset instead.

German government bonds emerge as a relative winner

Government bonds have faced increasing pressure as investors reassess the sustainability of public finances across major economies. Borrowing costs in countries including the United States and Japan have recently reached multi-decade highs, weakening confidence in long-dated sovereign debt as a reliable safe haven.

However, the recent sell-off in technology shares has revived some demand for bonds, with German government debt standing out among major markets.

Earlier this month, when US and French 10-year government bond yields climbed to 24-year highs, German yields moved lower, indicating rising demand for German Bunds. Bond prices and yields move in opposite directions.

Germany's top-tier credit rating and reputation for fiscal stability have helped its government bonds retain their defensive appeal during periods of European market stress.

Bundesbank President Joachim Nagel has emphasised Germany's role as an anchor of stability in Europe amid the turmoil in bond markets.

Johnathan Owen, a portfolio manager at TwentyFour Asset Management, said German Bunds had provided a useful defensive instrument as investors assessed the risk of contagion from French and Italian bond markets, Reuters reported.

Short-dated government bonds offer protection

Although concerns about government borrowing are weighing on longer-dated bonds, short-term sovereign debt could offer investors a relatively safer alternative.

Short-dated bonds are generally less sensitive to changes in interest rates and long-term fiscal expectations than their longer-maturity counterparts. This can make them more resilient when investors are concerned about rising debt levels, persistent deficits and higher borrowing costs.

Rory McPherson, chief market strategist at Wren Sterling, said the firm favoured short-dated bonds amid concerns about government debt and deficits, Reuters reported.

The preference reflects a broader reassessment of bond-market risk. Investors seeking stability are increasingly distinguishing between short- and long-duration debt rather than treating government bonds as a single defensive asset class.

However, short-dated bonds are not entirely immune to changes in monetary policy, inflation expectations or credit risks.

Gold retains long-term appeal despite volatility

Gold has also swung sharply despite its reputation as a store of value during periods of uncertainty.

The precious metal reached a record high of $5,595 per troy ounce in January before retreating after the Iran war began. Investors sold gold holdings to offset losses in other parts of their portfolios, demonstrating that even traditional safe havens can come under pressure during episodes of market stress.

Gold subsequently rallied in August as inflation concerns resurfaced and investors questioned whether the US Federal Reserve was doing enough to contain price pressures. The metal is currently trading around $4,175 per ounce.

Continued purchases by central banks and demand for protection against geopolitical risks have helped support gold prices above $4,000, analysts said, according to Reuters.

While elevated interest rates can limit gold's upside because the metal does not pay interest, persistent geopolitical tensions and concerns about US government finances could support prices over the longer term.

Julius Baer analyst Carsten Menke said gold could benefit from continued strong central-bank purchases and renewed concerns about US debt and the growing interest burden, Reuters reported.

What investors should watch

The latest market trends suggest that safe-haven demand is becoming more selective. The US dollar continues to benefit from its liquidity and the country's energy-exporting position, while the Swiss franc is attracting investors concerned about European political and fiscal risks. German Bunds are showing relative resilience, and short-dated government debt is gaining attention as investors reduce exposure to long-term borrowing risks.

Gold remains supported by central-bank demand and geopolitical uncertainty, although its recent volatility highlights the importance of considering liquidity needs and portfolio-wide losses during market sell-offs.

For investors, the key takeaway is that no single asset is providing consistent protection against every risk. The effectiveness of a safe-haven allocation will depend on the nature of the market shock, interest-rate expectations, fiscal conditions and the need to raise cash during periods of heightened volatility.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)