One could argue that the dollar has simply been tracking U.S. interest rate expectations and debt yields lower over the past week. Both have been spooked by warnings of a rare contraction of the once bulletproof U.S. economy.

But this was also a period in which Washington initiated its long-threatened trade war, undermining regional North American allies while also backing away from its transatlantic military alliance over the fate of Ukraine. Anxiety, tension and uncertainty are running extremely high.

The dollar has typically thrived in such moments of great stress in the past, mainly as nervy global investors usually seek a liquid haven in either U.S. Treasury bonds or dollar cash deposits to ride out any storm.

That behaviour has long been known in currency markets as part of the dollar “smile”. The basic idea is the greenback tends to rise in times of hot inflation and rising U.S. interest rates, but also in times of great geopolitical disruption as the world seeks safety.

As the shape of a “smile” would suggest, the dollar tends to sag in value in between the extremes, when all is calm and well.

To be sure, a dash for safety in bonds may well be underway locally on Wall Street this week, with investors fleeing pricey U.S. stocks due to the rare and sudden rise in recession angst.

But the buck’s simultaneous drop on the foreign exchanges in recent days suggests global investors are much less drawn to America as a haven this time around.

Even though Mexico’s peso and Canada’s dollar weakened on the news of new U.S. tariffs, the euro and Japan’s yen surged to their best levels of the year.

The DXY index, which measures the dollar against the most-traded currencies, fell to its lowest point since early December.

And this is at least partly due to foreign investors having improved alternatives at home as well as growing concern over the direction of U.S. economics and politics.

European savers and investors – partly responsible for pumping up Wall Street’s bubble-like tech sector over the past four years – may simply be returning to the safety of home.

Thanks to U.S. President Donald Trump’s goading, Germany and other European nations are seriously discussing rapid rearmament. And European investors now have the economic spur to justify taking advantage of far cheaper equity valuations on the eastern side of the Atlantic.

HAVEN NO MORE?

Deutsche Bank’s top currency strategist George Saravelos reckons it’s hard to overstate the scale of the global political and trade rethink this week. “Two pillars of America’s role in the world are being fundamentally challenged,” he said.

He noted the highest average U.S. tariff rate since the collapse of the Bretton Woods fixed exchange rate era in the early 1970s is coming just as severe damage to the transatlantic military alliance is forcing Germany and Europe to plan hundreds of billions of euros worth of defence and infrastructure spending.

The fall of the greenback in tandem means “the potential loss of the dollar’s safe-haven status against that backdrop has to be looked at,” he said. “We do not write this lightly.”

Most notable for Saravelos was the breakdown in the correlation between the dollar and risk assets that he says has been at the core of portfolio construction over the past decade.

To be sure, the Trump team may love the sight of a falling dollar. The president lambasted Japan and China again this week for “killing their currencies” to outflank U.S. trade rivals.

And the administration may even enjoy the sight of rallying Treasury bonds reducing the country’s debt servicing costs.

But the prospect of damage to global role of the dollar may sit more uncomfortably – as would the sight of overseas investors fleeing Wall Street, so long the only game in town.

Taken to its limit, the prospect of “America First” at home may end “America First” for world investors.

Today’s key chart

Germany and the European Union have responded to growing doubts about Washington’s commitment to the Transatlantic alliance with rare speed and enormous funding plans for defence and infrastructure. This potential fiscal boost to the EU economy is electrifying markets and the euro. European stock indexes have outperformed the S&P 500 by more than 10% so far this year, with Europe’s defense stocks outstripping the Nasdaq 100 by about 35%.

Today’s events to watch

* U.S. February private sector payrolls from ADP, FebruaryUS service sector surveys from ISM and S&P Global, Januaryfactory goods orders * Federal Reserve publishes ‘Beige Book’ on economicconditions. Bank of England Governor Andrew Bailey and other BoEofficials answer questions in Parliament * U.S. corporate earnings: Campbell’s, Brown-Forman

Opinions expressed are those of the author.

(By Mike Dolan; Editing by Anna Szymanski.; mike.dolan@thomsonreuters.com)