What Are Safe-Haven Currencies (Dollar, Yen, Swiss Franc)
On days when stocks collapse, there are currencies that oddly rise in value. The U.S. dollar, the Japanese yen, and the Swiss franc. Why do people rush into these currencies the more frightened they become?
What is a safe-haven currency?
A safe-haven currency is a currency that people rush into—thinking 'let's just park it here for now'—when the market is gripped by fear (risk-off).
The representative trio are the U.S. dollar (USD), the Japanese yen (JPY), and the Swiss franc (CHF).
What is interesting is that these currencies tend to actually weaken during calm times (risk-on). Normally, people move money to higher-yielding emerging-market currencies or stocks, and then all at once flow back into safe-haven currencies when a crisis comes.
Source: Deutsche Bundesbank 'Swiss franc and US dollar are safe haven currencies.' Safe-haven currencies have an asymmetric nature: strengthening in crises and weakening in calm times.
Why specifically these currencies
To become a safe-haven currency, a few conditions are needed: political and institutional stability, low inflation, trust in the central bank, and a deep, highly liquid financial market.
The U.S. dollar has the world's largest government bond market, so money rushes into 'the easiest safe asset to sell (U.S. Treasuries)' during crises. This drives up demand for the dollar.
The Swiss franc is counted as a safe-haven currency thanks to centuries of political neutrality, a solid banking tradition, long-standing current account surpluses, and the fact that Switzerland is not an EU member (somewhat insulated from EU-wide shocks).
The Japanese yen often strengthens because Japan is the world's largest net external creditor, combined with the 'unwinding of the yen carry trade' (the flow of buying back borrowed yen) during crises.
Actual data: the 2008 financial crisis
Numbers are clearer than words. From July 2008 to March 2009, during the stretch when global stock markets were collapsing, safe-haven currencies moved like this.
The Dollar Index (DXY, the value of the dollar against major currencies) rose about +22%.
The yen strengthened, moving from the 110-per-dollar range to below 88 (yen value up about +20%).
The Swiss franc also strengthened from about 1.10 per dollar to near parity (1.00).
In other words, during that period when stocks caused big losses, someone holding these currencies actually gained. This is also why 'currency diversification' helps with crisis defense.
Source: NordFX 'Safe-Haven Currencies: USD, JPY, CHF.' However, there is no guarantee they 'always rise in a crisis' — in early March 2020 during COVID, even the yen and franc temporarily lost ground to the dollar due to a dollar liquidity shortage.
よくある質問
Q. So can I just hold safe-haven currencies?
No. Safe-haven currencies tend to actually weaken during calm times, so their returns can be low during the majority of periods when no crisis comes. They are also not 'always' safe — in situations of extreme dollar shortage like March 2020, even the yen and franc were temporarily shaken. It is important to view safe-haven currencies as 'insurance,' not a 'primary investment.'
Q. Is the Korean won a safe-haven currency?
No. The won tends to actually weaken (the exchange rate surges) when a crisis comes. In 1997 and 2008, and during various global shocks, the won–dollar rate jumped sharply. So for Korean investors, there is room to consider whether holding some dollar assets helps defend against exchange-rate moves in a crisis. However, this varies by individual situation and is not a recommendation to buy any particular currency.
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