Throughout history, certain national currencies have displayed remarkable resilience when confronted with economic turmoil, market crashes, recessions, and even the ravages of war.
These steadfast currencies, often referred to as “safe havens” by economists and foreign exchange (Forex) traders, have proven to be reliable shelters in times of financial storms.
As we stand on the precipice of potential economic challenges, with some economists warning of a looming recession in 2024, this article delves into the Forex arena to explore two safe-haven currencies that seem well-prepared to weather the storm when compared to their counterparts.
Characteristics of safe-haven currencies
Safe-haven currencies are called that because they serve as a shield against the unpredictability of financial markets.
In times of uncertain global economic prospects, investors often reposition their assets into these currencies and other safe-haven assets as a means to safeguard their wealth.
The main rationale behind this strategy is that safe-haven currencies are generally better equipped to retain or even enhance their value, unlike the more volatile alternatives such as less resilient Forex currencies or stocks.
US dollar (USD)
Unsurprisingly, the US dollar (USD) is one of the select few Forex currencies with a safe-haven status, primarily due to the United States’ demonstrated economic and political stability.
This reliability is attributed to the ability of the U.S. Treasury to meet its financial obligations. Over the years, it has become the world’s leading reserve currency and is extensively utilized in global trade and financial transactions.
Consequently, investors often seek refuge in the U.S. dollar during times of market turmoil, making it a go-to choice for preserving wealth.
Japanese Yen (JPY)
The Japanese Yen (JPY) is also acknowledged as a safe-haven currency, even more so than the US dollar. This is due to a combination of factors.
Japan has a robust current account surplus, positioning it as the world’s largest creditor nation, and instilling confidence in its currency.
Additionally, the Yen’s role as a popular carry trade currency, where investors often borrow low-interest Yen to invest in higher-yield assets, can lead to a surge in demand for the Yen during times of financial uncertainty as these trades are unwound.
This appreciation of the Yen has been observed during various global crises, making it a preferred choice for risk-averse investors. However, Japan’s reliance on exports and the potential negative impact of a strong Yen on its economy necessitate occasional intervention by the Japanese government to maintain a competitive currency value.
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Source: https://finbold.com/2-forex-currencies-to-hold-in-a-recession/