Who is the strongest safe-haven currency in the forex market

Safe-haven currencies, aka hedge currencies, are relatively stable, not easy to depreciate, nor easily affected by policies, war, market fluctuations and other major international events, and can avoid investment risk as much as possible. However, safe-haven currencies can also fluctuate with market. Among them, the Japanese yen, the Swiss franc, the US dollar and gold are the four most famous safe-haven currencies.

The Swiss franc, the US dollar

As we all know, Switzerland is a permanently neutral country. So it is considered to be the safest place in the world, coupled with the protection policy adopted by the Swiss government on finance and forex, for which a large amount of forex has poured into Switzerland. The Swiss franc has become a popular currency for international settlement and forex transactions. Therefore, the Swiss franc has been seen by investors as a traditional safe-haven currency for a long time. The international political situation may suddenly become tense or the uncertainty of economic growth increases, thus the Swiss franc will become the first choice for investors to transfer funds.

The US dollar can act as a safe-haven currency, which is closely related to the economic strength of the United States. At the end of the 19th century, the US economy developed rapidly, elevating its global status. Then the United States won the second World War, and gold started to flow into the country. When the Bretton Woods system, an international monetary system centered on the US dollar, was established, the United States became the first power country in the world.

Japanese yen

The yen has become a safe-haven currency for both historical reasons and social-economic factors. The first is that it reflects a stable currency value and low inflation as well as the size, structure and resilience of economy of the currency-issuing country and the ability to isolate external shocks. The second is the degree of financial market development. The third is the degree of openness of the market. Safe-haven currencies need to be freely convertible, and the financial markets are sufficiently open.

Japan has both the second largest dollar reserves in the world and the large number of US dollar claims, which means it is extremely difficult to short the yen. Whats more, although Japan's domestic debt is heavy, its foreign debt is very small, so the Japanese government has always enjoyed a high credit rating. Importantly, in order to stimulate the economy, the Bank of Japan continues to reduce interest rates. Japan has been taking a nearly zero interest rate monetary policy for a long time. This is why the yen can be a safe-haven currency.

The good liquidity of the yen is also one of the reasons why it has become a safe haven currency.

1： Low interest rate.

If there is a sharp cut in interest rates, it will cause a large number of hedging transactions to devalue the currency, and a currency cannot become a safe-haven asset when in a sharp devaluation. However, the yen has a very low interest rate, which means that the possibility of a sharp depreciation of the yen is very low! Under this condition, the yen can become a safe-haven asset.

2: location and political

Japan is a Pacific island country with a total land area of only 377,800 square kilometers. Based on the special geographical environment as well as the scarcity of resources, it is difficult for Japan to call a war with other countries. Although Japans land area is very small, it is a developed country. It can be say that it has a strong economy system. Furthermore, Japan has always been attached to the United States. With the support of the United States, the yen can be relatively stable, which is why many investors prefer the yen.

3: Japanese yen can be circulated freely.

The Japanese yen is a free-circulating currency in the world, and there will not be too many restrictions on its circulation. This property of free circulation opens a “channel” for the yen to become a safe-haven currency. Only a currency that is circulated freely can attract investors.

Why does the yen become the strongest safe-haven currency？

As long as the interest rate of a currency is low enough and the liquidity is large enough, it can become the financing currency of the carry trade, and this is why it called “safe-haven currency”. The yen is lucky to meet these two conditions, so it can become the strongest safe-haven currency.

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