LONDON, England - March 1, 2011 - While rising tension in the Middle East and North Africa have sent crude prices skyrocketing and hurt developed market equities, the U.S. dollar has failed to benefit from this rise in risk aversion. This has many questioning the greenback’s status as a safe haven.

When Israel announced that Iranian ships would travel the Suez Canal, the EUR/USD rallied. This demonstrated that the euro is now the flight to quality destination, according to Douglas Borthwick, managing director at Stamford, Connecticut-based Faros Trading.

Similarly, when Egyptians were demanding the resignation of Hosni Mubarak, the EUR/USD strengthened, then sold off after he stepped down. The Swiss franc and Japanese yen have also acted as important safe haven currencies recently.

Borthwick estimates that the U.S. dollar is 8% overvalued because of the flight into the currency that came in the wake of the demise of Lehman Brothers and Europe’s debt problems.

“The unwinding of this situation could see a significant move higher in the EUR/USD,” he said in a recent note to clients.

Adam Cole, global head of FX strategy at RBC Capital Markets, believes the U.S. dollar’s failure to rally does not reflect a change in its save haven status, but rather a change in the role that risk appetite is playing in driving foreign exchange markets.

“Risk appetite is now playing second fiddle to interest rate expectations in driving FX and it is the different reaction function of the Fed and ECB that explains USD weakness,” he said in a recent report.