Safe Haven Currencies

Let's consider the topic
of safe-haven currencies.

A safe-haven currency is one
which does well in bad times.

So when the global economy
becomes riskier

or something bad happens,

some currencies tend to appreciate

because they are considered
safe havens for investors.

The classic example here is the US dollar.

During the American
financial crisis of 2008-2009,

a lot of really bad things happened
to the United States economy.

Yet, oddly, at these exact same times,

quite often the value of the US dollar
would rise on world markets.

This may seem counter-intuitive,
but it's reflecting a safe-haven effect.

People figure that
if things get really bad,

well, a lot of different assets
and asset classes will be in trouble,

and they ask themselves,

"Well, which is actually the safest
of those remaining?"

And the US dollar, actually,
in the minds of investors,

does pretty well on that score.

Another safe-haven currency,
very frequently, is the Japanese yen.

And another safe-haven currency
is the Swiss franc.

Like Japan, Switzerland has a reputation
for being a very sound and stable place.

It's certainly perceived
as such by investors.

So during bad or risky times,

there's often an inflow of money
into Switzerland

and an appreciation of the Swiss franc.

What are the factors behind
what might be a safe-haven currency?

Well, there's some disagreement here,

but overall some of
those factors would include

the long term stability
of purchasing power in that currency,

the general geopolitical outlook
for that country,

its monetary and fiscal policies
and how good those are,

the size and safety of the country;

that's one factor
favoring the United States;

whether that country has
a significant role in global trade

including the use of that currency
as a reserve currency;

that would probably be
robust even in bad times.

Quite important is the liquidity
of markets for that currency

and, also, the net asset position
of the country;

simply, how much wealth
has that country accumulated

relative to how much
it owes other parties.

There are some other potential
safe-haven current,

sometimes, but not always cited.

Those would include the euro,
sometimes, the Korean won,

or even the Norwegian crown.

If you go back to the previous list,

you'll find that these are not nearly
as safe haven, at least as of 2013,

as the US dollar, the Japanese yen,
and the Swiss franc.

It might sound like a good thing
to be holding a safe-haven currency,

well, maybe it is because, in bad times,
it gives you more protection;

that's a kind of insurance.

But, keep in mind, there's always
trade-offs in economic activity.

So a currency which is giving you
more insurance protection upfront

is probably paying you,
all other things equal, lower returns.

So, just keep this in mind,

there is a trade-off
between risk and return

when considering the costs and benefits
of holding safe-haven currencies.

For more on this topic,
the best place to start

is simply to put
"safe-haven currency" into Google

and also into scholar.google.com.