Safe-haven currency choices under Trump’s tariff policies

The global trade system is currently experiencing the most profound shock since World War II. On April 2, the "reciprocal tariff" policy introduced by the Trump administration officially came into effect, triggering an immediate cascade of reactions across global markets. Following President Trump's decision to suspend many of the tariffs, the global stock market remains volatile. Unsurprisingly, there is a growing investor preference for low-risk assets, with safe-haven currencies seen as stable refuges that preserve value during periods of turbulence, writes Chen Li, Economic Research Fellow at ANBOUND.

Safe-haven currencies are typically those that either maintain or appreciate in value amid heightened uncertainty. These currencies often benefit from the stability of their underlying economies or possess attributes that extend beyond the policies of any single nation. Common examples of safe-haven currencies include the U.S. dollar (USD), Japanese yen (JPY), Swiss franc (CHF), and gold (XAU). The U.S. dollar, as the global reserve currency with deep liquidity, is frequently the go-to asset in times of economic turmoil, benefiting from the "cash is king" effect. The Japanese yen, supported by Japan's low-interest-rate environment, current account surplus, and economic stability, is another favored safe-haven currency. Similarly, the Swiss franc is often sought after due to its political neutrality, low debt levels, and stable financial system. Gold, though not a fiat currency, is treated as a "borderless currency" because of its enduring value and its ability to act as a hedge against inflation and currency devaluation during times of crisis. While all these assets are considered safe havens, each exhibits unique investment dynamics, which warrant closer examination in light of the ongoing financial and geopolitical volatility.

The U.S. dollar, as the primary global currency for trade and reserves, stands out for its liquidity, making it the favored safe-haven asset during crises. With the U.S. at the helm of an escalating trade war, the dollar's appeal remains strong, as many investors have exited U.S. stocks and moved into safer dollar-denominated assets, such as U.S. Treasury bonds. The relatively high coupon yields on these bonds have attracted long-term capital, including sovereign wealth funds. Furthermore, the Federal Reserve's recent commitment to keeping interest rates unchanged in the near term has helped stabilize the dollar, keeping U.S. Treasury bonds attractive for now. However, the U.S. fiscal situation is increasingly worrisome. The federal budget deficit for the first five months of fiscal year 2025 reached USD 1.15 trillion, a 38% increase from the previous year, driven by rising debt service costs and social security expenditures. This fiscal expansion, combined with the possibility of interest rate cuts by the Fed, raises concerns about the long-term creditworthiness of the dollar. Additionally, the risk of stagflation in the U.S. economy continues to grow, with the Consumer Confidence Index falling to a two-year low in March and core PCE inflation hitting 2.8% in February. Trump's tariff policies could push inflation up by an additional 0.5 to 1 percentage points, further undermining the dollar’s strength. Over the long term, as U.S. economic growth slows and interest rate cuts become more likely, the dollar may depreciate. While short-term risks may abate, funds are likely to seek diversified allocations in the future.

On the other hand, the Japanese yen's status as a safe-haven currency is bolstered by several factors in the current environment. Traditionally, the yen has been a key financing currency for global carry trades, as Japan's long-standing zero or negative interest rate policies make it a low-cost borrowing option. However, as the Bank of Japan (BOJ) gradually raises interest rates, the cost of yen funding is increasing, and the unwinding of currency carry trades is becoming more pronounced. As the BOJ moves away from its quantitative easing policies, the carry yield of yen assets has improved, further attracting investors. This policy shift, combined with Japan's economic resilience and its less trade-dependent economy, positions the yen as an attractive safe-haven asset. The Japanese economy’s 2.2% annualized growth in Q4 2024, driven by strong domestic demand, makes Japan less vulnerable to external shocks like the ongoing trade war. Additionally, the yen's low correlation with the European economy strengthens its role as a risk-hedging tool.

The Swiss franc is another notable safe-haven currency. After the Swiss National Bank (SNB) reduced interest rates, the franc's appeal has been somewhat reduced compared to the yen, though it remains a strong contender for those seeking safety. With the EU economy under pressure due to U.S. tariffs, Switzerland has become an increasingly attractive destination for funds fleeing the eurozone. Similar to the 2011 European debt crisis, the Swiss franc has seen significant appreciation in times of European turmoil. However, the SNB may intervene to prevent excessive currency appreciation, and the Swiss franc's smaller market size and liquidity mean it is better suited for regional, rather than global, safe-haven demands.

Gold, a unique non-currency safe-haven asset, warrants separate consideration. While not a fiat currency, gold has long been regarded as a "borderless" store of value. Amid stock market declines, rising inflation expectations, and escalating trade tensions, gold prices have surged, surpassing USD 3,100 per ounce, marking an 18% increase since the beginning of the year. Data from the end of March shows that deliveries of gold on the New York Commodities Exchange (COMEX) reached 44.5 million ounces, reflecting panic-driven buying behavior during times of market distress. Gold’s primary advantage lies in its non-governmental nature, making it immune to the policies of any single nation and serving as a natural hedge against inflation and currency devaluation. However, gold has its drawbacks, including lack of yield, larger short-term price volatility, and lower liquidity compared to traditional currencies. As such, gold is often better viewed as a complementary asset rather than a primary safe-haven investment.

All in all, amid the escalating global trade conflict, the U.S. dollar’s safe-haven status remains intact, but it faces constraints due to domestic economic stagflation and fiscal risks. In contrast, the yen, supported by monetary policy shifts, the unwinding of carry trades, and robust domestic demand, exhibits stronger safe-haven advantages. Gold, as a "borderless asset," provides investors with an essential tool for diversifying risk beyond currency-based safe havens.

Share this article: