In volatile times for the global economy, whether due to war, pandemic, or economic downturn, those with wealth want to keep it safe. When it comes to currencies, investors turn to one of the very few ‘safe-haven’ currencies.
A ‘safe-haven asset’ is a type of investment that is expected to hold or increase in value during times of market instability, or risk. There are several types of safe-haven investments that investors turn to, to diversify their portfolios. Gold is the most well-known, but more prosaic items such as corn and cattle are safe. Some stocks, known as ‘defensive’ stocks, are safer than others, such as in food industries and healthcare. Government bonds and treasury bills are another, and so is currency.
A currency is generally considered a safe haven if the economy behind it is stable, and able to withstand turbulent times and unexpected (‘black swan’) events such as the Covid-19 pandemic. Independence from trading blocs, a secure political system and a diverse economic base are all part too. The country holding large amounts of foreign currency itself, helps, as it can sell it to buy back its currency when required.
In times of economic instability, investors rush to these currencies, and as we all know, increased demand makes them more likely to hold or increase in value.
The US dollar (USD) is the most obvious and widely traded safe-haven currency. As the threat of Russia invading Ukraine grew in February 2022, the USD soared. It soared again in October 2023, when Hamas attacked Israel. As you might expect, the euro, on the edge of the conflict in both cases weakened. But the dollar strengthened against almost all other currencies, not just the euro.
What are safe-haven currencies?
The US dollar
The start of the pandemic, the start of the Ukraine war, and the threatened start of a global recession all sent investors converting cash holdings to dollars.
The greenback is backed by the world’s largest economy and is viewed as the world’s reserve currency, so investors tend to lean on it during times of instability.
Swiss franc
Switzerland has a large, stable and safe banking industry, as well as being the base of many international organisations. It tends to have a low-volatility capital market, extremely low levels of unemployment and trade balance figures which tend to land on the positive side. It is independent of the European Union, but works well with the EU, as part of the European Economic Area (EEA).
Japanese yen
There are some occasions when the USA has bad news, especially economic or security, or both. In those cases, rather than the dollar, investors seek out the yen (JPY) as a safe haven. This happened during the global economic crisis in 2008.
Japan’s strong and stable economy as a technology powerhouse on the Pacific rim, is a key factor in the yen’s haven status. It also has large foreign reserves itself and is willing to buy back yen when required.
Even so, JPY’s status as a safe haven has come under threat, especially in the past year, where it has lost out heavily to the US dollar. Part of that may be down to the issues of the past year – with energy prices rocketing and Japan having no fossil fuel of its own. The yen has also suffered from the Bank of Japan’s extremely dovish stance on interest rates, which are still at -0.1%.
However, a different crisis and the yen could again be a safe-haven asset.
The euro
In normal times the euro would be seen as a safe-haven currency. It is part of a stable democracy and contains three of the G7 countries – Germany, France and Italy. However, war on its doorstep in Ukraine and threats to European industry from Russia cutting off gas supplies have damaged its status for now.
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Why isn’t sterling a safe haven?
The evidence has been that investors have sold the pound in recent crises, from real ones like the war in Ukraine to speculative ones such as worries over China’s threat to Taiwan.
According to some sources, the writing was on the wall for sterling as soon as prime minister David Cameron offered an EU referendum in 2013 and risked severing trade links with the UK’s biggest trading partner.
The British economy is also heavily dependent on service industries (similarly, a currency like the Norwegian krone is prevented from being seen as a safe haven due to its dependence on commodities), the UK has few energy supplies of its own and has suffered political instability in recent years.
How can you protect your assets against currency fluctuations?
Smart Currency Exchange works with individuals to help them better manage their foreign exchange risk. Speak to Smart Currency today to be assigned a personal trader, who can discuss your requirements in detail and suggest strategies such as forward contracts to help manage and mitigate foreign exchange (FX) risk.
