The chart by currency fund manager Axel Merk of Merk Investments shows the 1-year rolling correlation between the U.S. dollar index and 10-year Treasury notes over the past 18 years, revealing a steep plunge from the summer of 2012 until today.
That drop-off means that while U.S. Treasuries are currently viewed as a safe haven, attracting investment, the U.S. dollar is not simultaneously rising but is in fact falling against a basket of currencies.
In other words, there is a flight out of the greenback at the same time as the flight to the safety of Treasuries. It’s not that the two assets are moving out of correlation; rather, the relationship is one of high and rising negative correlation (of close to -0.60).
A variety of conflicting approaches could explain this divergence. For example, Merk entertains the possibility that investors would turn to the dollar in a “real” crisis versus today’s “subtle” crises.
But the veteran currency manager prefers a different explanation. He says the sharp selloff in the dollar began precisely when European Central Bank head Mario Draghi promised to do “whatever it takes” to save the eurozone.