What are safe-haven currencies and how to trade them?

Investors should diversify their portfolios due to potential risks, volatility, and price fluctuations. Some assets are more likely to change rapidly, while others tend to keep stable levels, even in times of crisis. That is why safe-haven currencies get a lot of attention from beginners and experienced traders.

What is safe-haven currency?

A safe-haven currency is a currency that is most likely to level or increase its value during an economic crisis. The high uncertainty forces investors to look for assets regarded as stable and confident. These currencies owe their stability to the economies of countries, which history shows reliability throughout the ages.

Safe-haven currencies usually distinguish themselves from others due to strong liquidity, low inflation – at least in comparison to the others – and a secure political system. Moreover, these assets don’t tend to correlate with more volatile stocks, bonds, and commodities. These are the reasons why safe-haven currencies are so resistant to market turmoil.

The SimpleFX platform offers numerous currency pairs to trade, including those with safe-haven status.

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How to trade safe-haven currencies?

Some investors might think that safe-haven currencies are flawless assets that will never plunge or even decline. However, there are several reasons for potential harmful outbreaks for those willing to focus only on these pairs. Changes in monetary policy, international affairs, geopolitical events, trade relations, and internal issues can affect the performance of some currencies.

On the other hand, safe-haven currencies are relatively unaffected by prices’ massive fluctuations during an economic crisis. That’s why traders should pay attention to national monetary policy and domestic issues to determine the best moment to trade safe-haven currencies.

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What about a potential high demand during uncertain times in the world’s economy? The export competitiveness of some countries can be flawed. There were some cases in Switzerland (spoiler alert!) in 2011 and 2015 when, due to constantly increasing demand, the Swiss National Bank intervened.

Examples of safe-haven currencies

There are three currencies with safe-haven status:

US Dollar

The US Dollar owes safe-haven status to the political and economic reliability of the United States. Moreover, it is the reserve currency used worldwide in international trade and finance.

Japanese Yen

Even though Japan has a significant level of public debt, the Japanese yen is also considered a safe-haven currency. The Land of the Rising Sun contributes to international trade with its robust economy and fundamental external assets.

Swiss Franc

Investors often treat the Swiss Franc as a safe-haven asset for several reasons. The political independence, in addition to a strong economy and low debt levels, gives CHF that status.

As a result, three of the most reliable safe-haven currency pairs are USD/CHF, USD/JPY, and CHF/JPY.

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Is the Euro a safe-haven currency?

Analysts argue whether the Euro is a safe-haven currency or not. Both parties have their compelling arguments. Euro supporters point out high liquidity and low-interest rates, which result in a positive economic outlook in several European countries. However, the European Union is diversified into almost thirty independent countries, not to mention that some of them haven’t introduced the Euro yet. It causes a vulnerability to political and economic turmoil, which shows the example of Brexit.

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Investors willing to trade the Euro should analyze its behavior compared to different assets. As it turns out, the European currency performs well against riskier ones.

Safe-haven assets other than currencies

Thanks to its historical performance as a reliable store of value, gold is treated as the most popular safe-haven asset, excluding already mentioned currency pairs. Traders also pay attention to government bonds due to their low default risk and volatility, in addition to stable returns.

To sum up, safe-haven currencies play a pivotal role in creating the landscape of the global economy. These are the most popular assets for investors willing to prevent their funds from economic turmoil. These currencies are well-known for their stability due to the robust economic situation of countries such as the United States, Japan, and Switzerland.