Safe haven currencies

What is a safe haven currency?

A safe haven currency is a currency that is considered to be safe during geopolitical and economic turmoil. Consequently, when events like natural disasters, war and stock market crashes occur, currency traders invest in safe havens, causing the value of the safe haven currency to rise and the value of currencies paired with it to fall, even though the events may not have had an obvious impact on the currency in question.

What makes a safe haven currency?

Due to the popularity of the carry trade, interest rate differentials have often been associated with safe-haven status. However, this trend isn’t consistent across the market, as it only seems to be a factor when trading the currencies of advanced countries as opposed to emerging countries. This implies that the liquidity of the currency being traded is a driver of safe-haven status, as major currency pairs have greater liquidity than exotic currency pairs.

Also, when global risk aversion is high, liquidity in some markets may dry up, causing traders to invest in highly liquid currencies. In turn, this gives the most liquid currencies an extra boost.

For a country to be considered safe and low risk, it should be isolated from global events in case there is a crisis, and it should have good fundamentals, like economic management and strong industry. In theory, the currencies of such countries could be seen as safe haven currencies.

In practice, it is increasingly difficult to achieve isolation in an increasingly globalised world. So factors like the size of a country’s stock market, which indicates its financial development and market size, now seem to outweigh the external vulnerability associated with its net foreign asset position.

Which currencies are considered to be safe havens?

The US Dollar, Swiss Franc and Japanese Yen are all referred to as safe haven currencies. I’ll discuss each one in separate posts.

Related articles

• Forex features – safe haven currencies – the CHF (talkingforex.wordpress.com)
• Forex features – safe haven currencies – the JPY (talkingforex.wordpress.com)
• Forex features – safe haven currencies – the USD (talkingforex.wordpress.com)
• The Norwegian Kroner as a safe haven? (talkingforex.wordpress.com)