Safe haven currencies tend to maintain or increase their value in times of uncertainty and market volatility. These currencies have high liquidity, a broad economic climate, and a stable financial and political system.
The US dollar, the Swiss franc, the Japanese yen, and the euro are considered the main safe haven currencies today.
The US dollar has always been a shelter currency during political and economic turmoil. During a financial crisis, investors tend to transfer their assets into the US dollar or treasury bonds denominated in dollars.
The status of the Swiss franc as a safe haven is supported by a stable Swiss government, a strong financial and banking system, and consistently low inflation. The Swiss franc is a popular instrument of the carry trade. A carry trade is a strategy for making profits on the foreign exchange market through different interest rates. In practice, it looks like when an investor takes funds in one currency at a low-interest rate, converts them into another currency, and deposits them at a higher interest rate.
The Japanese yen as a safe haven is driven by factors such as Japan’s strong current account surplus, making it the largest creditor in the world. At the same time, the Bank of Japan has kept interest rates consistently low. So investors, just like with the Swiss franc, are using the yen as a carry trade. Since both the US dollar and the yen are considered safe haven currencies, investors typically look to cross pairs such as GBP/JPY, CAD/JPY, and AUD/JPY.
Euro. In recent years, low-interest rates in major European economies have caused the euro to act as a safe haven. But in 2022, both the ECB and the US Federal Reserve began aggressively raising interest rates, so the euro has somewhat lost its shelter currency status.
What are Other Assets Considered Safe Havens?
Definitely, it’s gold. Gold has long been considered a safe haven because it is a physical asset. Investors tend to buy gold in times of financial, political, and economic turmoil. Gold plays an important part in central banks’ reserve management.
Recently, the Norwegian krone and the Chinese yuan have been increasingly considered safe haven currencies based on the country’s lack of net debt and current account surpluses. But liquidity in currency pairs with the Norwegian krone and Chinese very low compared to the above, but the situation is improving year by year.
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