Safe Haven Currencies – Profiting In Times Of Risk Aversion?
In times of crisis, such as now, the currency market and its different types of currencies can be the most precious assets of all the financial and investment markets that exist in the world.
Significant declines in conventional assets such as stocks, bonds or commodities, drive up the demand for cash enormously, which causes the value of the currency to increase. When there are such market sell-offs, it is essential to know that there are safe-haven currencies that maintain the same value or even increase it in times of crisis or instability.
This form of refuge is ideal in crises because they tend to have an inverse relationship with the performance of risky assets such as stocks, which further guarantees the stable value of their currency.
These are the 4 currencies in the FX market that are considered the safest:
The US Dollar (USD)
The US dollar is the official currency of the United States of America. It is the most widely operated currency globally, responsible for an average daily volume of USD 2.2 trillion.
The American currency is considered safe because bond investors receive payments from the US treasury. The idea arises that in times of crisis, investors are mainly dedicated to selling risky assets and obtaining treasury bonds. For this reason, the American currency is safe for many people.
However, some analysts deduce that there is not enough evidence that the dollar is used significantly in difficult times. They argue that seasoned investors prefer commodities such as gold and silver. Unfortunately, there is no evidence to back this claim either.
In reality, the USD is still the most reliable and most stable currency in the world. And for as long as the US Treasury controls it, that won't be likely to change.
The euro is the official currency of the European Union (EU) and the second most traded currency in the world. It accounts for an average daily volume of almost USD 800 million and is issued by the European Central Bank.
The euro has the characteristics of a safe currency. In recent years, European analysts have become more enthusiastic about the idea that it may prove to be a tremendous economic advantage.
Furthermore, low-interest rates in major European economies hinted that the euro could act as a safe-haven.
Swiss Franc (CHF)
The Swiss franc is the official currency of the Swiss Confederation and the seventh most operated globally, representing an average daily volume of USD 122 million.
This currency has been considered in recent decades as one of the most stable and secure. Its stability and security are mostly due to Switzerland's political and economic position. It also highlights its essential role of interrelation with European economic policies and its complex fiscal and monetary system.
Japanese Yen (JPY)
The Japanese yen is the official currency of the State of Japan and the third most operated worldwide, representing an average daily volume of close to USD 550 million.
Also, the yen is considered a widespread trade, as investors frequently borrow it. It causes the country's rate to rise, which, ironically, may raise the price of the yen during a financial crisis negatively affecting its home nation. The reason for this increase is that international entities choose to get rid of risky decisions and pay loans in yen.
Therefore, the yen's ability to be used for trading or payment makes it incredibly useful during harsh financial times, which is why that makes it a safe-haven currency.