Safeguarding Your Portfolio With Safe Haven Currencies

Amidst global inflation and recession, many countries are barely keeping heads above water, struggling economies made worse by one or both of political challenges and natural events. The resultant impact of exchange rates globally is a source of concern for individuals who save and invest their money and companies involved in international trading. Turning to haven currencies may be the key to preserving the financial value of a portfolio of assets.

Safe Haven Currencies

Despite poor economic conditions globally, certain currencies are expected to retain their value or even experience an increase during economic uncertainty. These currencies also experience periods of turbulent markets, but overall, they are stable in relation to other currencies and often return a healthy profit margin for holders.

Three currencies are designated as safe haven currencies: the US dollar (USD), the Japanese yen (JPY), and the Swiss franc (CHF). If you want to view the growth of such currencies, a platform like TradingView provides more information about their exchange rates, market news, and conditions.

The USD

The US is the most robust economy globally, with a GDP of 40% greater than that of China, the world No. 2, in 2022., and over five times that of the subsequent two largest economies, Japan and Germany. The USD is also the world’s primary reserve currency, held by 65 countries, and makes up over 50% of the global foreign exchange reserves. Over the years, the USD has held its value against a basket of solid currencies, including the British sterling and the euro.

The CHF

The CHF is Switzerland’s currency, backed by a strong economy and political stability. Switzerland has a long history of international trade and holding banks for many foreign savers. The country also has a healthy trade surplus and is considered a critical net creditor in the foreign exchange sphere. The CHF has mainly remained stable over the years and has outperformed many currencies in the global markets.

The JPY

Japan’s reliable economy has positioned the JPY as a global safe haven currency, thanks to its status as a net creditor and its trade surplus. The Japanese economy has made significant strides over the last few decades, overcoming challenges and competing with the strongest countries.

 

Factors Determining the Safe Haven Status of Currencies

These key factors determine the status of a currency as a safe haven:

Political and Economic Stability

The country issuing the currency must be politically stable at all levels, having no challenge to its territorial sovereignty. The country must also have a robust economy that can absorb events without sudden and prolonged negative impacts on markets. Where these are absent, the currency’s value diminishes as investors consider it a high-risk investment for their portfolios.

Liquidity

Another factor impacting a currency’s status is the ease of trading, especially when markets are turbulent. The USD, for instance, is highly liquid and used for international trade and settlements in various market conditions. Currencies paired with the USD also have high liquidity compared to others, making the USD excellent for storing value.

Interest Rates

Monetary policy is an important indicator of economic health. Countries with high interest rates are often likely to experience high inflation, and countries with low interest rates have their inflation under control. The JPY, CHF, and USD fall in the latter category.

Financial Markets

The development of a country’s financial markets also impacts the currency. Advanced nations with more high-valued companies on their stock markets have greater liquidity in their financial markets to support their currency and absorb market changes better than those with lower liquidity. Larger markets support a currency’s safe haven status.

Carry Trade Flows

Investors find opportunities during periods of risk. They do this by borrowing low-interest currencies to buy high-interest assets and then reversing the flow when the rates change. The currency receiving the most inflow is often a safe-haven currency, as investors believe it offers better returns for its worth.

Challenges With Safe Haven Currencies

Preserving your portfolio with haven currencies comes with the theoretical risk of the currency becoming overvalued, which impacts economic growth and competitiveness. If this continues for longer periods, the safe-haven currency may gradually lose its value as investors lose confidence in its ability to stay afloat.

Another risk is the rise of rival trading blocs, such as the BRICS, that may seek a different currency to dominate the international market and move focus from existing status. This could impact the status of a currency such as the USD as the reserve currency and its safe haven status.

Diversification Is Key

While preserving the value of a portfolio, it is essential to diversify around the safe haven currencies and never just on one. Holding a mix of the USD, JPY, and CHF is safer than holding only one of those currencies. Safe currencies are pretty effective for preserving financial value. Like all decisions, it must be carefully considered and planned to make the most of it and keep associated risks minimal.