What is a safe asset? There is growing discussion on this issue, yet we think that, at its core, a safe asset does not face significant uncertainty. If there is more policy uncertainty, safety fundamentals are in jeopardy. A safe asset, whether short-term Treasury bills or a safe haven currency, will have low volatility, so we must devise other means of measuring safety.
A safe currency will have low volatility, but most safe-haven currencies will also have low volatility. A better measure may be relative uncertainty. If the US has high uncertainty compared to other safe-asset countries, then on margin, the US will see fewer safe-asset flows. The dollar outflow will mean that capital must move to another safe haven. It could flow into the Euro or Japan, or if there is a general increase in policy uncertainty, it will be gold. Note that the dollar increased during the pandemic, even though US uncertainty spiked versus Europe, so more work has to be done on this topic.
A good second-order effect is to examine policy uncertainty not just in the US but globally. It is the relative uncertainty that matters.
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