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Why Global ˿Ƶ Turn to Safe Haven Currencies

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Bob Iaccino, for CME Group

At a Glance:

  • ˿Ƶ tend to look for countries with economic and financial stability when considering a currency’s safe haven status
  • The U.S. dollar, Swiss franc and Japanese yen are among the most commonly cited safe haven currencies

Safe haven currencies can be an important component in a global investors’ toolbox, particularly during periods of high market volatility or geopolitical uncertainty. ˿Ƶ often use them to mitigate risk and preserve capital during “risk-off” periods, when there is less appetite for investments that typically carry more risk.

Understanding the role of these currencies, the reasons they are considered safe havens and their behavior during turbulent times is crucial for managing investment risk effectively.

˿Ƶ expect a safe haven currency to retain or increase in value during times of market turmoil, making it a desirable option for those opposed to risk. Key characteristics of a safe haven currency include:

Political Stability: Countries with stable political systems are less likely to experience economic volatility, making their currencies more attractive during uncertain times.

Economic Strength: Economies that are large, resilient and diversified can better withstand global economic shocks, supporting the strength of their currency.

Financial Depth: Currencies of countries with deep and liquid financial markets tend to be preferred as safe havens because they allow investors to enter and exit large positions without significantly affecting the currency’s value.

Low Inflation Rate: A stable and relatively low inflation environment contributes to a currency’s purchasing power, enhancing its safe haven appeal.

Traditional Safe Haven Currencies

U.S. Dollar (USD): The USD is the world’s reserve currency held by most central banks and institutions as part of their foreign exchange reserves. The U.S.'s dominant economic position and the widespread use of its currency in global trade make the USD a preferred safe haven.

Swiss Franc (CHF): Switzerland’s long standing policy of political neutrality and fiscal prudence contribute to its status as a safe haven. Moreover, the Swiss National Bank’s (SNB) commitment to maintaining currency stability attracts safe haven investments.

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Japanese Yen (JPY): Japan’s large economy and financial market liquidity make it a safe haven despite its high public debt levels. Some may argue against the idea that Japan has robust economic fundamentals, but the yen benefits from Japan’s current account surplus, which provides support during economic downturns.

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A Balanced Portfolio

During periods of high uncertainty, such as financial crises, geopolitical conflicts or economic downturns, investors tend to shift assets toward safe haven currencies. This shift is driven by a strategy to reduce exposure to potential losses in investments that can carry more risk like stocks or emerging market currencies.

By including safe haven currencies in a portfolio, investors can diversify their holdings, thereby spreading risk and potentially reducing overall portfolio volatility. ˿Ƶ holding assets in higher risk currencies may buy safe haven currencies to hedge against potential losses. This strategy is a favorite of multinational corporations and global investors who need to manage currency exposure across different markets.

Many investors’ primary goal in times of crisis is to preserve capital. With their stability and reliability, safe-haven currencies can provide shelter for capital, potentially maintaining value when other assets may be declining.

The demand for safe haven currencies typically increases during risk-off periods, leading to appreciation against other currencies. When investors seek liquidity and safety, the simultaneous sell-off in higher risk assets and currencies can drive this appreciation.

However, the role of safe haven currencies is not static and can be influenced by global economic conditions and central bank policies. For instance, intervention by central banks , currency buying or changes in interest rates can affect a currency’s perceived safety and attractiveness. By understanding the characteristics that make these currencies safe havens and how they can be utilized in risk management strategies, investors can better navigate periods of uncertainty and volatility in global markets.