In times of uncertainty or crisis, money can flow to safe-haven currencies and other assets. These assets are considered a safer investment when there is market worry or panic.
Which currencies are safe havens?
Traditionally, the safe-haven currencies are:
The US Dollar(USD)
The Swiss Franc(CHF)
The Japanese Yen(JPY)
Historically, all three safe-haven currencies are highly liquid and linked to countries with low inflation and political stability. However, in recent years, political instability in the US has led to questioning the Dollar's safe-haven status.
There are other reasons why the USD, CHF, and JPY are havens:
The USD is considered a haven due to the economic size and stability of the United States. The Dollar is also the reserve currency of most countries and is often used as the primary currency for international trade and finance.
Switzerland's political neutrality doesn't just save them from high defensive costs; it has helped their national currency to become a haven. Switzerland has also historically been a strong economy that has performed well under times of global stress.
Japan is often seen as having a large and stable economy and is often geographically safe from historical crises.
Other safe-haven assets include:
Gold
Government bonds
Defensive stocks during times of war
Emerging markets
Why use safe-haven currencies?
In Forex, a crisis can see the USD, CHF, and JPY strengthen while other currencies weaken. So, buying safe-haven currencies can be profitable during these times.
Safe-haven currencies can also protect against extreme market volatility.
When to use safe-haven currencies?
During times of crisis, money flows to safe havens, strengthening safe-haven assets and weakening non-safe-haven assets.
Times of crisis can include:
War and the potential of war
Trade frictions
Global recessions
Pandemics
Market uncertainty
Anything else?
Times of crisis can see significant, volatile moves and weekend gaps, even with safe-haven currencies.
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