-
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.