An Introduction to ‘Safe-Haven’ Currencies

The global forex market is renowned for its inherent volatility, with currencies widely traded as derivative assets that enable investors to speculate on price movements rather than assuming ownership of the underlying instrument. 

So, it seems strange to discuss the concept of “safe-haven currencies”, which sounds like an oxymoron given the highly volatile and leveraged nature of currency in the global marketplace. 

However, such currencies do exist, with these entities offering considerable advantages to investors. We’ll explore these below, while identifying the ‘safest’ currencies in the existing market. 

Please hold in mind the idea that all currencies change in value relative to another, and therefore, even a ‘stable’ currency may experience a significant change in its exchange rate with some other currencies. This means that safety is subjective and depends upon which currency pair you trade. All forex trading contains risk (as the best books will tell you), and trading using high leverage or margin increases that risk significantly.

What is the safe-haven currencies concept? 

In simple terms, a safe-haven currency is an asset which is deemed a safe and secure place in which to invest and store funds, relative to investments and assets with a similar risk profile. 

For example, the Japanese yen is widely considered to be a safe-haven currency, with the asset having earned this accreditation through the various banking reforms that followed the Asian financial crash in 1997. 

JPY is a relatively safe haven when compared to emerging and exotic currencies such as the Mexican peso, and slightly more volatile major assets like the Euro. 

We’ll touch more on the safest haven currencies in the current marketplace later in the piece, but such entities can usually be identified by the fact that their value tends to rise during times of economic uncertainty or recession. 

This was certainly true during the great recession, with the JPY rising by a whopping 24% against the dollar in 2008 and immediately following the banking crisis. 

What are the safest haven currencies? 

Aside from the yen, other safe-haven currencies include the US dollar, the Swiss franc and (by some measures) the Euro. 

Unsurprisingly, these are each classed as major currencies, of which there are eight that comprise seven major pairs and account for 68% of the world’s total daily trading volumes on the foreign exchange. The best forex brokers will include many combinations of these major pairs as standard.

More recently, the British pound has emerged as a potential safe-haven as it continues to showcase major resistance and rise against the dollar.  

At the same time, some clear psychological levels have become visible in the GBP/USD pairing, making the pound a manageable and identifiable safe haven that can provide solace as the dollar continues to fluctuate. 

The reputation of the pound as a viable safe haven may also continue in the wake of Brexit, as the UK begins to import less and potentially benefit from more competitively priced exports. 

What are the benefits of safe-haven currencies? 

The main benefit of safe-haven currencies is that they provide solace in, particularly volatile market conditions, by enabling investors to convert large holdings of cash for the purpose of protection. 

Take the Swiss franc, for example, which is safeguarded by a uniquely protected economy and a stable banking system. This means that the currency typically experiences a strong upward pressure stemming from increased foreign demand, as investors flock to capitalise in the region’s low-volatility market. 

In the case of the USD, this asset has become a default safe-haven for commercial investors who may be facing domestic or regional uncertainty. 

After all, the greenback remains the world’s most dominant reserve currency and the primary denomination for international trade and business deals. 

The safe haven concept becomes a self-fulfilling prophecy. The market consensus that certain currencies are safe havens, explains strong inflows of capital into those currencies during turmoil. This happens as active managers and private investors react to market events by de-risking their investment portfolio. This ‘risk-off trading causes the value of safe-haven currencies to rise in some circumstances. (This is supply and demand in action, to learn more on this topic check out the best economics books). These surges in value reinforce the market’s view that safe havens are optimal assets to hold during a crisis.