When a recession strikes, investors often turn to what are known as “safe-haven” currencies as a means of protecting their wealth. These are currencies that are typically seen as being less risky and more stable, such as the US dollar, the Japanese yen, and the Swiss franc.
During a recession, the demand for safe-haven currencies tends to increase, as investors flock to these currencies in an effort to shield their assets from the economic uncertainty and market volatility that typically accompanies a recession. This increased demand can lead to appreciation of these currencies against other, riskier currencies.
Why do investors view certain currencies as being safe havens? It’s largely a matter of perception. The US dollar, for example, is seen as being a safe-haven currency because the US economy is considered to be relatively stable and the country has a strong track record of maintaining a stable currency. Similarly, the Japanese yen and the Swiss franc are also viewed as safe-haven currencies, due in part to the low levels of inflation and political instability in those countries.
Of course, it’s important to note that no currency is completely risk-free, and the value of any currency can fluctuate based on a wide range of factors. However, safe-haven currencies are generally considered to be less volatile and more stable than other currencies, making them an attractive option for investors looking to protect their assets during times of economic uncertainty.
In conclusion, during a recession, the demand for safe-haven currencies tends to increase, which can lead to appreciation of these currencies against other, riskier currencies. While no currency is completely risk-free, safe-haven currencies are generally viewed as being less volatile and more stable, making them an attractive option for investors looking to protect their wealth during times of economic turmoil.