It is one of those immutable laws of investing that, when the chips are down and the world is fraught with risk, it’s advisable to stick with the US dollar as the safest place to park your money. The past few months has been no different, as the coronavirus crisis has deepened and the dollar has outshone all else as a beacon of safe haven security. All investors want is capital protection, a reasonable rate of return and a good chance of getting their money back on time. There is no such thing as a safe one-way bet in financial markets and, at some stage, the appetite for risk will return, investors will start to push their luck and the dollar will eventually lose its lustre. While the coronavirus continues to rage, dollar dominion is not in doubt. The only question is for how long. There’s certainly no shortage of detractors eager to write off the dollar as a has-been currency, fit for the scrapheap. The return to near-zero US interest rates , the Federal Reserve’s newly rebooted quantitative easing and the eye-watering Treasury bonds issuance needed to pay for economic rescue have hardly done the currency any favours. But the dollar is not alone; the Japanese yen, the euro, the British pound and a whole host of other currencies have all had their fair share of problems. The dollar’s edge over the competition is that it is a tried and tested hedge in times of crisis. It has a well-proven track record as a global medium of exchange with impeccable reserve asset status. Investors’ ability to get in and out of the dollar quickly and easily is beyond doubt. What might be the game changer in the coming months is the risk that the Fed, faced with a dramatic collapse in US growth, may be forced to give the green light for US interest rates to follow Europe and Japan into negative territory. Relative interest rate factors generally need to be favourable for the dollar to compensate for the US’ comparatively weaker fiscal and trade fundamentals. More recently, this safety net has been falling away as US interest rate and bond yield spreads have converged towards those of other major currencies. The three-month gap between the US and euro Libor deposits has virtually closed to zero, while the 10-year US Treasury yield spread to German government bonds has narrowed to 1.2 per cent. It is a trend that has been moving against the dollar for weeks now. Its comfort buffer is fast disappearing. End of US dollar dominance? Not as long as America’s institutions hold up It’s all down to timing – how bad the US data looks over the coming months and whether the Fed panics. First-quarter US growth data was bad enough, with the economy contracting at a 4.8 per cent annual rate, but this only partly reflected some of the early fallout from the coronavirus. It is a matter of conjecture how bad the drop in demand might be for the second quarter, with some suggestions that the economy could collapse by as much as a third. With US unemployment already rocketing and President Donald Trump desperate for a much-needed re-election boost, the Fed will be under intense pressure to deliver the fast V-shaped recovery Trump craves. The odds are that Fed chair Jerome Powell will eventually cave in to negative rates. If Germany’s ultra-hawkish Bundesbank can do it, then so can the Fed. Negative interest rates could mark a critical turning point for the US currency. There will be continuing safe-haven dollar support while the pandemic lasts, but investors will be on the lookout for exit strategies nevertheless. As the world emerges from the worst of the crisis, the flow of funds out of US dollar investments into higher-risk markets could hit the currency very hard. There should be some degree of comfort as leveraged investors seek to diversify their funding options between US dollars, euros, yen and Swiss francs to finance carry trades into higher-yielding investments, such as in emerging markets. Even so, the potential weight of switches by US mutual funds from domestic investments into overseas markets could keep the dollar under significant pressure for quite a while. Until there is a breakthrough on beating the coronavirus, the dollar should remain on relatively safe ground. But once global confidence is restored and safe haven trades begin to unwind, dollar durability will be back in focus. Positive dollar tailwinds could peter out very quickly. The dollar could nose-dive between 10 and 15 per cent in the next 12 months. David Brown is chief executive of New View Economics Help us understand what you are interested in so that we can improve SCMP and provide a better experience for you. We would like to invite you to take this five-minute survey on how you engage with SCMP and the news.