AS and A2 Macro: Exchange Rates and “Safe Haven” Currencies

This article from the WSJ highlights one determinant of exchange rates that we may not be too familiar with, whether or not a particular currency is regarded as a “safe haven” i.e. if a particluar investor fears that a currency will not hold its immediate or future value, then said investor may choose to exchange it for one which is more likely to.

The Swiss franc, traditionally regarded as a safe haven, appreciated amid fears over impending global economic doom until the Swiss National Bank decided to cap its rise last month. “Since the move by the Swiss, investors and analysts have been sifting through the ranks of the world’s currencies for replacement safe havens.” And what currencies fit the bill? “Among those passed under the microscope as possible replacement safe havens were currencies from Sweden, Norway, Canada, Australia and Singapore.”

Because of the many factors driving exchange rates, FOREX trading is said to be notoriously risky and in these uncertain times, investors seem to opting for the traditional islands of safety, the dollar and the yen - as one fund manager commented “In times of trouble, at the end of the day you just buy dollars.”