A New Safe Haven Framework for a Multipolar World

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What’s an investor to do when policy uncertainty in the U.S. not only undermines the status of U.S. financial assets, but also provokes wars on the other side of the globe? The U.S. dollar and U.S. Treasuries are no longer the investor safe havens they once were, while Israel attacked Iran out of fear that Washington would allow Tehran to pursue its nuclear program in its negotiations over a new nuclear accord.

So Long, Safe Haven

As I have written previously, there is typically a negative correlation between the S&P500, on the one hand, and the U.S. dollar index and the prices of U.S. Treasuries, on the other. Yet, in 2025, that “safe haven” relationship has gone into reverse, meaning that a weaker dollar and higher Treasury yields have accompanied U.S. equity market declines.

The most recent weakening of the USD versus EUR has also come on the back of declining U.S. inflation. In April, there was a 2.5% annual increase in the personal consumption expenditures index, the Fed’s favored inflation metric. This is the lowest print since 2021 and within spitting distance of its 2% target. Along with recent soft U.S. jobs market data, these factors favor a Fed rate cut. On the other hand, the recent Israel-Iran-driven oil price spike and ongoing economic uncertainty virtually guarantee that the Fed will keep rates on hold this week.

Yet interest rate differentials really don’t explain this year’s USD weakening, because of ongoing ECB rate cuts have occurred even as EUR appreciates against the greenback. In fact, investors are well-aware that tariff-fueled inflation risk in the U.S. is significant, which - if realized - would result in tighter monetary policy, theoretically strengthening the USD. Truly, rate differentials favor a stronger USD against EUR, but the opposite has happened.

The Tariff Question: Inflation Is Coming

One of the biggest questions is whether tariff-fueled inflation has fed into the prices of affected goods imports yet. The administration is keen to argue that the latest low inflation prints are evidence that tariffs won’t generate more inflation, and that the Fed should thus cut rates.

More likely, however, is that the price rises of tariff-affected imports will only begin to be felt over the coming months. In anticipation of U.S. tariffs earlier this spring, U.S. firms front-loaded import-buying before the levies had a chance to take effect. Amid such large inventories, the initial import surge masks the potential for sharp declines in trade activity. Case in point, China's exports to the U.S. dropped by 34% in May, the largest such decline in over five years. Volatility in shipping container bookings and traffic appears to confirm this narrative.

The level of tariff-fueled U.S. inflation on the horizon is fully unknown because that depends on the final shape of the U.S. tariffs, trading partner retaliation, demand elasticities for the affected goods, and consumer behavior. But it is coming. This paints a stagflation-adjacent picture for the U.S., with slightly stronger inflation and weaker output, with the IMF, World Bank, and others having slashed their U.S. growth forecasts.

Where To Run, Where To Hide?

It is quite the challenge for investors to decode where to park their money in an investment landscape that has changed so drastically in less than six months. The U.S. still has the strongest growth outlook in developed markets. So although many institutional investors are changing their allocations to increase their exposure to Europe, Japan, and emerging markets at the expense of the U.S., it is still far from clear whether or how quickly their U.S. weights will revert to long-term averages. Tariffs or not, the U.S. remains an innovative juggernaut and economic powerhouse.

Moreover, if the ECB has cut rates so much it is also partly due to Europe’s anemic growth. Even if sectoral plays such has European defense stocks amid Germany re-armament and U.S. withdrawal could well be a long-term trend, it is unclear that efforts by some European countries to promote business-friendly policies will go far enough for institutional money inflows to unleash growth. The UK and Japan have demonstrated their ability to strike rapid trade deals with Trump but are both also afflicted with a growth problem.

The obvious answer to this constrained opportunity set in DM is that investors should look more closely at EM. Here, the trick will be to dodge global risk sentiment and geopolitics alike, which will be no mean feat. Low-beta EM, especially among oil exporters and/or where currencies are undervalued, could prove to be an effective hedge. Also consider how closely-linked an EM is to the U.S., with those closer to EU or Chinese orbits potentially offering better insulation.

The GCC ticks a lot of these boxes but suffers from its geographic proximity to Iran and, to a lesser extent, its dependence on the U.S. Central and Eastern Europe offer a lot of promise, despite their exposure to Euro Area sluggishness.

Investors like Asia for the fundamentals, and there is currently a boom in Chinese exports to Vietnam, Thailand, Indonesia, and Malaysia. Not because of rising demand there, but as trans-shipment points to the U.S. Here, too, however, there are risks: China is at the center of the US-led trade war. And the threat of instability hangs over much of the region, from the Korean peninsula to Taiwan.

It is Latin America that is emerging as the truest EM safe haven region, partly because it is isolated from the world island’s constant wars. Brazil and, to a lesser extent, Colombia combine oil exports with a willingness to stand up to the hegemon diplomatically, to certain extents at least. The caveat here of course is U.S. exposure, whether through trade with Mexico, monetary policy via Ecuador’s full dollarization, or Trump-Milei ideological affinity.

Disclaimer: The content provided in this newsletter is for informational purposes only and should not be construed as financial, investment, or other professional advice. While I strive to ensure accuracy, I make no guarantees regarding the completeness or reliability of the information presented. Readers are encouraged to conduct their own research and consult with qualified financial professionals before making any investment decisions. The author and publisher are not responsible for any actions taken based on the information provided.