The US dollar is now the world’s sole “save haven” currency, and looks set to increasingly benefit from an ongoing flight to safety as the fortunes of other currencies regarded as sanctuaries wane, according to Jack McIntyre, portfolio manager at Brandywine Global.

The firm, a subsidiary of Legg Mason, is currently overweight the dollar, in what it calls a “tactical position.” McIntyre concedes that the dollar faces some fundamental problems and it seems doubtful that the political will exists to correct these, but it still believes that the greenback – and yen – will benefit from a flight to quality with markets staying in “risk off” mode.

McIntyre points to the possibility that the Japanese government will have to move to curb its currency’s ascendancy because a strengthening yen is proving prohibitive to doing business there. He also notes that the Swiss National Bank’s move to cap the franc’s rise against the embattled euro makes it doubtful that the franc will continue to benefit from those seeking a safe haven.

“As a result of the threat of further interventions by the SNB we think the US dollar, by default, will benefit in periods of market stress,” he says, noting that one threat to the rise of the dollar is a third round of quantitative easing by the US government.

However, McIntyre is given confidence by the belief that more quantitative easing would take a different approach. “Operation Twist, for instance, takes the proceeds from the front end of the yield curve to buy long-dated bonds – something that will be good for the long curve. While it might not be supportive of the dollar as such, it won’t put pressure on it, which is what we have seen with other types of monetary stimulus,” he says.

He notes that while quantitative easing has put downward pressure on the greenback, it hasn’t been particularly helpful to Treasuries either. “It’s counter-intuitive because you think that the Fed buying US Treasuries would be supportive of bonds, but in that environment they did not do well. Only when the markets saw the end of QE coming did it become a good environment for Treasuries. Non-QE periods have clearly been better for bonds over the past three years,” he says.

McIntyre says that going forward the Fed will be vigilant about heading off the threat of deflation with the US economy still showing disappointing growth and budget deficit reduction measures in the offing. He expects that the Fed will have learnt from the mistakes of the Japanese and will do “whatever it takes” to prevent deflation – a real threat amid spending cuts and tax hikes.

McIntyre says his firm’s global bond portfolios have been overweight exposure to US Treasury duration for much of 2011 which has helped their performance. “However, with it appearing more and more likely that the US will avoid a recession and with the potential that Europe will avoid repeating a ‘Lehman’ type of risk event, we have recently been reducing our exposure to high quality bonds in our portfolios,” he said.