Protests, earthquakes, wars and bailouts. But no love for the dollar

THROUGHOUT 2011, we have had sustained periods of uncertainty in the money markets. In the past, uncertainty and turmoil have given rise to rallies for the greenback as a result of investor flight into the safety and liquidity of this safe haven currency.

Continued turmoil in the Middle East, concerns over the ongoing European sovereign debt crisis and fears that rising commodity prices could put the brakes on the global economic recovery have given forex traders sleepless nights. But where it would usually be bought up faster than drinks on an expense account, the dollar has found itself being left out in the cold while other currencies receive a warm reception from investors.

So which is the new safe currency? Has the dollar simply seen a short term fall from grace or is this a long term effect? Has the Swiss franc knocked the dollar off its perch or have the traditional haven currencies been usurped completely in favour of gold and silver? These two commodities have seen constant strong growth this year, particularly when political turmoil or natural disasters have hit hardest, but have these rises run their course, or can they rise still further?

For an answer, we’ve asked a selection of currency experts for their opinions on how the land lies for haven currencies, and where they expect the top destinations for those seeking shelter from the storm will be this year.

Arguably the US dollar has lost its safe haven label for the vast majority of this decade – the one time we saw investors falling over themselves to buy the dollar was in the epicentre of the financial meltdown in the second half of 2008 – the rest of the time plenty of other currencies have looked far more attractive.

It is still the case today of course – it would be something of a contrarian play at the moment to view the dollar as a safe shelter with Standard & Poor’s firing warning shots concerning US long-term debt and the Fed happy to pay the price of a weaker dollar if it keeps the economic recovery going. For the foreseeable future the haven “currencies” are likely to remain the likes of gold and silver. Although the pedants can debate whether these qualify as actual currency, the liquidity and availability of these markets put them firmly in the forex camp for me – although the volatility is not something that everyone can stomach.

The Swiss franc still has its place and continues to make somewhat more sedate progress to all-time highs against the dollar than the likes of silver and gold. In the long term you should never rule out a recovery for the greenback, but the short and medium term suggests there are plenty of more secure destinations for cash.

Even though the dollar has seen considerable weakness in the last few years it should not be underestimated as a safe haven asset. During the height of the banking crisis in 2008 investors flooded back into the dollar as they pulled out of riskier assets and even today when there’s a whiff of bad news geopolitically or fundamentally with the financial markets, the dollar usually benefits. The main reason for its weakness is the continual quantitative easing and money printing that the US have been undertaking, on top of the record low interest rates, which have lead to serial devaluation of its currency.

But as the dollar continues to decline and its status as the world’s reserve currency is called into question, there are other currencies and asset classes that investors are buying as an alternative to the greenback. Gold of course has seen tremendous strength in the face of the dollar’s decline, but at some point this bubble will burst. Other currencies such as the Swiss franc are attractive due to its historical safe haven attributes and relatively high yield compared to other currencies.

For now there is no real alternative, so the dollar will remain the world’s reserve currency for some time to come, but its crown as the king of safe havens is being challenged day by day.

A safe haven currency needs to be politically and economically stable, neither of which spring to mind when you talk about the US dollar. However, we wouldn’t write off the dollar as a safe haven just yet as other havens have their own issues to deal with. The yen has been rising on the back of risk aversion fuelled by the death of Osama bin Laden, yet Japan is hardly a haven of political or economic stability at the moment. Even when we talk about gold as a safe haven there are issues. Firstly, there is only a certain amount of gold available. The yellow metal is already trading at elevated levels, so going forward investors may be put off from flooding into gold with prices so high. Added to this, gold is traded on an exchange, FX is not.

As we have seen with silver recently, exchanges can change margin rules without giving any notice, which can disrupt price action. This is not exactly the type of risk you want in a “safe haven” asset. This leaves the Swissie – our favourite safe haven. Politically it is stable and after getting its fingers burnt in 2009 and 2010 the risk of the Swiss central bank intervening to push down the value of the Swissie seems remote for the time being.

Safe haven currencies have long been those that many will flock to when the going gets tough and I don’t think that will change. However, what might change is which currencies traders will be flocking to. I do think the dollar will remain as a haven, but will share this status with a few others. However, all of the major currencies have their problems. The dollar is already struggling amid its rather lacklustre economic recovery, but due to its power and stable government will always remain top of the list. The Swiss franc has its own problems. Despite not being part of the euro its exposure to European banking stocks leaves the currency a little vulnerable. The yen remains very near the top of the safe haven list; however, the financial and political implications of the earthquake and nuclear disasters will leave many questioning its safe haven potential. Despite the problems, these currencies are all still seen as safe havens and are joined by the commodity based currencies. These could well be a much safer bet, as the movement of the currency is not only based on the overall strength of the economy. The Australian dollar is one that continues its strength due to its commodity dependence. Of course we also cannot overlook the Chinese yuan, many people’s tip to overtake the US as the world’s major currency. All in all, safe havens are here to stay and, with the current global stories resulting in the risk-on/risk-off trade changing regularly, these currencies as well as the gold price will benefit.