How Japan Took the Safe Haven Role from Switzerland

How Japan Took the Safe Haven Role from Switzerland

The Swiss Franc didn’t work as a safe haven currency during the recent crisis – the dollar and the yen took this role. Here’s the story.

In the past, the Swiss Franc had a reputation as the No. 1 safe haven currency. This means that every time that there was an economic crisis, political instability, fear of recession or even an earthquake somewhere in the world, the Swiss Franc would strengthen. There were many good reasons for this:

Switzerland enjoys a strong industry and also enjoyed a sound financial sector. The famous Swiss banks are a big asset to the economy. But the recent financial crisis hit the banks – the US and the UK were badly hurt by the credit crunch, but also the Swiss banks suffered – the crisis was around the banking system.

As part of overhaul that came in the aftermath of the financial crisis, stronger regulation is sought everywhere. Policymakers aren’t only cracking down on their national banks, but also looking abroad. Tax havens in various countries are eyed by the lawmakers. In addition, the famous privacy of the Swiss banks also came under attack.

European countries such as Greece, Iceland, Spain, Portugal and even Italy and Britain had financial troubles. Switzerland’s location in the heart of Europe also undermined its status.

Seizing the Yen

With all the aforementioned reasons, traders looked to the East and saw the Japanese yen. It had a low value due to its low interest rate and the popular carry trade. As interest rates plunged worldwide, the yen lost its disadvantage.

Geography plays a significant role also here – Japan’s side of the world had less troubles. China’s boiling industry kept moving forward, especially after the huge stimulus package there. Also Australia didn’t enter a recession, and New Zealand suffered only a minor one.

The Japanese economy changed its image from deflationary, stagnated and boring to stable and sound. The carry trade lost its charm and the yen turned into the safe haven currency.

State of safe havens

It’s important to note that also the US dollar enjoys this status. This is somewhat absurd – the big bang of the crisis was the collapse of Lehman Brothers. The economy in the US took a big blow – a big jump in unemployment and an economy that deteriorate quickly.

Nevertheless, the status of the US as a superpower that will know how to get out of the trouble it had a big part in creating pushed the dollar higher as well.  In many cases of bad figures, the dollar enjoyed the risk aversive trading, but the yen enjoyed it even more.

As the crisis unwinds, the Swissy is gaining strength and also stability – the ranges are becoming smaller, and it doesn’t suffer from big shocks. This may be a step towards regaining the safe haven status, but the road is still long. Rate hikes in Switzerland are essential for this process to continue.

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Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.