While the coronavirus news has caused the markets to shutter, correlations between asset classes have diverted from the norm of safe-haven assets rising while the stock market falls.

In times of the risk within the financial markets, there tends to be “safe-haven” assets that investors flock to in times of fear. These include gold, the Japanese yen, and (mainly Treasury bonds). However, some days have been stocks, bonds and gold all move in the same direction as of late. This begs the question: where are investors flocking to now?

The investors are now flocking to the U.S. dollar. The DXY an index for the U.S. dollar, has seen an 8% return from March 9 until March 20.

Investors have been piling out of the market and into the most liquid assets available including money market funds, short-term treasuries and cash. It is clear that investors are avoiding risk in the bond market and not liking the low yields in treasuries as a place to invest their money. Meanwhile, they are driving prices of gold downwards, in the same direction as the market, while strengthening the dollar. This is because gold’s value is pegged to a currency. In our example, it is being pegged to the dollar, thus any strengthening of the dollar will result in gold being worth relatively less.

One theory as to why gold has fallen in tandem with the markets is that there is a large liquidation of hedge funds. During market downturns like what’s happening right now, it is plausible that margin calls or liquidity issues force hedge funds to liquidate their positions into cash which causes a rise in the dollar and fall in gold. This could also be a reason for hedge funds lowering their long calls in gold.

It is also possible that the dollar’s rise as the current safe-haven arose from the investors’ unwillingness to lend money in the debt capital markets creating a potential liquidity crisis for companies and global central bank policies pushing interest rates, thus bond yields, to near all-time lows.

In addressing investors’ unwillingness to lend, this alone gives rise to the need for cash. It is likely that with any future event in which there is a perceived threat to business,s income would lead to the dollar being the new safe-haven. It does not seem sufficient as there have been prior time frames such as in August 2015 and January 2016, in which there was a threat to business income from a global slowdown leading to a stock market crash yet the dollar did not rally.

It is unknown if a future dollar rally in a market downturn can happen again due to low interest rates from the Federal Reserve, hedge funds temporarily having liquidity issues and not having as many long gold positions, or companies’ liquidity issues.  But more likely than not, there will be another future deviation of safe-haven asset correlations to the market, and the dollar will become a safe bet against the risky stock market.