Imagine paying the United States government to hold your money for three months.

The condition appears to turn investment theory on its head, but that's what investors are doing in today's uncertain, risk-averse markets.

Foreign investors are accumulating Treasuries at the fastest pace since 1988, up 12% since September, Bloomberg News reported Monday, citing U.S. Federal Reserve data. They are becoming institutional investors' mattress. The tactic is driving Treasury rates to record lows: the 2-year note has fallen to 0.76% from 3.11% on June 13, while the 3-month Treasury turned negative on December 9 for the first time.

Meanwhile, the 10-year and 30-year Treasuries have fallen to 2.55% and 3.04%, respectively -- not much return on your investment, but that's beside the point: investors currently are more concerned about the return of their investment than the return on their investment.

Still, economist David H. Wang said there's an upside and a downside to the lower interest rates for Treasuries.

Crises have a way of separating strong business models from sub-par ones. Similarly, they sometimes invalidate theories institutional investors and economists have adhered to for generations.

One example of the latter concerns the dollar. The Federal Reserve's balance sheet has increased to $3.5 trillion from $800 billion in September. Meanwhile, the U.S. budget deficit for fiscal 2009, will likely exceed $550 billion (pdf) and could top $1 trillion; it could top $1.2 trillion next year.

Had the aforementioned debt increases occurred in Brazil, Mexico, or Argentina, the result would have been a flight of international investors out of local investments, accompanying respective currency runs, and an ensuing domestic crises.

The impact of the increased debt on the United States? By almost all measures, it's been mild. Since September, the dollar has risen about 15% and 20% against the euro and British pound respectively. Meanwhile, borrowing costs for the U.S. government have trended lower, with interest rates on the 10-year and 30-year bonds falling to 2.79% and 3.29% respectively.

True, the dollar has fallen 13% versus Japan's yen, as institutional investors, unable to productively invest borrowed, low-interest-rate yen, returned that money to Japan, but by and large the dollar has remained firm amid the nation's worst financial and economic crisis in at least 40 years.

Many economists had expected the dollar to weaken. Economist Peter Dawson was one of them.

From fiscal and economic fundamental standpoints, this is something that shouldn't be happening. Or at least it wouldn't be happening in normal times.

But as investors know, and as currency traders will quickly point out, these are not normal times.

Safety is paramount

The dollar continues to hold its own, for the most part, versus the world's other major currencies, despite the fact that the United States is likely to bear the largest economic and fiscal costs stemming from the financial crisis and consequent recession. The dollar has held on to gains recorded earlier in the month against the euro and the British pound, at about $1.2670 and $1.4720, respectively, losing ground only against Japan's yen, at 96.60 yen.

Currency Trader Andrew Resnick said the dominant theme in the currency markets -- as in almost every market these days, it seems -- is risk aversion and a flight-to-safety.

"The dollar is clearly benefiting from the flight-to-safety. On an economic fundamentals basis, the dollar should not be this strong and U.S. interest rates should not be this low, but fundamentals are not ruling the day now," Resnick said. "Safety and the protection of capital is." Resnick added that he was presently flat, or had no open currency positions.

The dollar and yen surged Friday -- with the yen the clear winner head-to-head versus the dollar -- as traders and institutions added both currencies in a flight-to-safety on concern that all of the world's major economies will fall into a recession at the same time.

The dollar surged 3 cents versus the euro to $1.2642 and 6 cents versus the British pound to $1.5606.

The yen strengthened 4.7 yen to 92.64 versus the dollar and about 10 yen to 144.73 yen versus the British pound.

Institutions raise cash in dollars, yen

Currency Trader Andrew Resnick told BloggingStocks Friday, this morning's flight-to-safety is not solely due to economic fundamentals, which suggest slowing growth in the world's major economies, but also hedge fund / investment fund de-leveraging and closing out of losing stock positions.

"We're seeing many things happen at once, and that's producing these enormous moves. First, the carry trade [where traders borrow yen and invest it elsewhere] is unwinding. Leverage for investing purposes is declining as a trading strategy," Resnick said. "Second, major players are raising cash to cover redemptions, which is also causing stock markets globally to plunge."

"Third, we're seeing a re-pricing of risk to the higher, which is forcing some funds to raise even more cash, boosting the dollar," Resnick said. "Some of the moves are cash-necessary moves, but many are clearly panic-based, with traders exiting positions that have little chance of succeeding if the global economy continues to slow."

Is the dollar's status as the world's reserve currency coming to an end?

It could be, if present trends driven by corrective measures taken to stem the global financial crisis continue, in the view of one monetary official.

European Central Bank council member Ewald Nowotny believes a 'tri-polar' global reserve currency system is developing among Asia, Europe and the United States.

"What I see is a system where we have more centers of gravity," Nowotny said Monday in an interview with Austrian state broadcaster ORF-TV, Bloomberg News reported Monday. "I see for the future a tri-polar development, and I don't think that there will be fixed exchange rates between these poles."

The dollar has served as the world's reserve currency for more than 30 years. A reserve currency is one which financial institutions -- and nations, for that matter -- seek to own during times of financial crisis, stress, or uncertainty. The reserve currency attracts investors in a phenomenon called a 'flight to safety.'

The euro, the currency of the euro zone, this decade has challenged the dollar's reserve currency status, following its introduction into global financial markets in 1999. (Physical euro banknotes and coins began to circulate on January 1, 2002.) A series of U.S. fiscal policy and trade policy errors, among other factors, has caused the dollar to weaken against the euro from about 82 cents per euro in 2001 to the present $1.3317 per euro.