“The stature of the dollar matters,” wrote Henry M. Paulson, US Treasury secretary from 2006 to 2009, in an article in May. But right now, the US dollar’s stature is somewhat diminished, even in a climate of risk aversion that might ordinarily be expected to support safe-haven flows into the currency. Indeed, the greenback may continue to have a tough time of it. Paulson, writing in Foreign Affairs magazine on May 19, made the valid point that, back in late March , “global financial markets were collapsing amid the chaos of the novel coronavirus pandemic” and that “international investors immediately sought refuge in the US dollar, just as they had done during the 2008 financial crisis”. Yet last Friday, with the coronavirus pandemic still raging globally, the value of the US dollar versus a basket of currencies fell at one point to 94.358, a 22-month low. While rational investors flocked to the safety of the greenback in the initial stages of the pandemic, market perceptions have since changed. Three factors – rising social tensions in US cities following the death of George Floyd in Minneapolis on May 25, sharply worsening relations between Washington and Beijing , and concerns about the way the coronavirus health emergency is specifically playing out in the United States – have all combined to make markets less comfortable with holding greenbacks. Markets needed US dollars in late March because the greenback remains the dominant reserve currency used for global payments, but those needs were driven by fears that access to US dollar liquidity would become problematic. But need should never be confused with want. Efforts by the Federal Reserve, through currency swap lines with other central banks, have alleviated financial market concerns about global access to US dollar liquidity, allowing markets to take a more dispassionate view of the greenback’s prospects, particularly amid indications that the US’ approach to the pandemic seems to be less effective than that of other jurisdictions. So far, more than 4.2 million Covid-19 cases have been recorded in the US, with over 148,000 fatalities. Beijing should not dismiss anti-China talk as US election bluster At a policy level, the separation of powers between Washington and individual states, combined with an arguably less than sure-footed response from the Trump administration, is hardly reassuring for currency market practitioners. At the same time, markets are not oblivious to continuing social unrest in US cities, following Floyd’s death . And then there’s the deterioration, to put it mildly, in US-China relations. If US Secretary of State Mike Pompeo’s speech last week in California wasn’t enough to concentrate market minds, evidence of the chill in bilateral relations came in Washington’s decision to order the closure of the Chinese consulate in Houston and Beijing’s retaliatory move to shut down the US consulate in Chengdu . Currency markets aren’t stupid. In times of uncertainty, where risk aversion dominates thinking, the safe-haven status of the US dollar comes to the fore, but when those uncertainties become more nuanced, markets adjust. The present issue for the US dollar is that markets have now taken the view that, currently, there are better places to park money than the greenback, even though global uncertainties still dominate the foreign exchange narrative. A US attack on Hong Kong dollar peg would be counterproductive That doesn’t affect the primacy of the US dollar as the world’s dominant reserve currency, as there is no viable alternative at present, but it does markedly affect its value. However, that doesn’t necessarily translate into the renminbi’s strength versus the dollar. The yuan is arguably just as much a victim of the rupturing of the US-China relationship. Indeed, at the end of last Friday’s trading session in China, the onshore yuan was valued at 7.0162 to the US dollar, its weakest closing level since July 14. Yet the dollar was sliding against other major currencies and against precious metals. Gold traded above US$1,900 per ounce on Friday, its highest level since September 2011. In the currency space, the major beneficiaries of the US dollar’s recent fall from grace have been the euro and the Japanese yen, though it must be questionable how welcome these developments will be to policymakers in the euro zone and Japan, given that both have their own economic problems. US dollar bulls will argue that the greenback’s recent decline is merely temporary, and that as US economic prospects pick up and the pandemic comes under better control, markets will again focus on the factors that support greenback strength. Maybe so, but don’t expect the greenback to rally materially just yet. The stage is set for continued US dollar weakness. Neal Kimberley is a commentator on macroeconomics and financial markets