WASHINGTON — The U.S. dollar continues to hold its position as the world’s primary safe-haven currency despite recent volatility, the International Monetary Fund said Tuesday, as global markets react to renewed tensions in the Middle East and rising inflation risks.
IMF Chief Economist Pierre-Olivier Gourinchas said recent market movements suggest a return to traditional patterns, with investors once again turning to the dollar during periods of uncertainty.
“In this big shock… we’ve had movements that are more associated with the traditional response of the dollar as playing the role of a safe asset,” Gourinchas said during a group interview with reporters.
The dollar’s role had come into question last year when it weakened despite rising global uncertainty and trade tensions, an unusual divergence from historical behavior.
“We saw the dollar depreciating… a departure from what you would expect,” he said, noting that investors had not flocked to U.S. Treasuries as typically happens during market stress.
That trend has now reversed following the escalation of hostilities in the Middle East.
“Since the beginning of hostilities… the dollar has appreciated,” Gourinchas said, adding that “capital has been flowing out of emerging markets.”
He noted that several emerging market currencies have come under significant pressure.
“We’ve seen currencies… depreciated by sometimes a huge amount,” he said.
While U.S. Treasury yields have increased, Gourinchas said the rise has been more moderate compared to other major economies.
“They’ve been increasing less than other countries’ yields,” he said.
Overall, he said concerns about the dollar losing its dominant global role have diminished.
“I don’t think that there is a lot of questioning about the… place of the dollar in the international monetary system,” he said.
At the same time, central banks worldwide are navigating a complicated policy environment as higher energy prices fuel inflation while slowing economic growth.
Gourinchas described the current situation as a “negative supply shock” that is simultaneously driving up prices and weighing on economic activity.
In such circumstances, he said, policymakers must balance caution with readiness to act.
“If we are in a reference forecast where the shock is relatively short-lived… You can afford to wait, and you don’t need to do much,” he said.
However, he warned that inflation could become entrenched if it spreads beyond energy costs into wages and broader prices.
“The worry… is that… it starts moving into a general inflation problem, when all prices and wages start going up,” he said.
If inflation expectations begin to shift, central banks may need to tighten policy more aggressively.
“They have to communicate very clearly… we’re gonna step on the brakes… this is going to be painful,” he said.
Gourinchas emphasized that monetary policy cannot directly resolve supply-driven shocks such as rising oil prices.
“You raise your policy rate, it’s not gonna change the price of oil,” he said.
Instead, central banks must focus on preventing secondary effects, particularly the risk of a wage-price spiral.
“They have to be super vigilant… on the lookout for signs,” he said.
The IMF’s assessment comes as global financial markets remain volatile following disruptions to energy supplies and rising commodity prices linked to the Middle East conflict. (Source: IANS)
