In uncertain times like these the US Dollar is still remaining considerably stable and in fact gaining in value. Why is that? How is that when strong currencies like the British Pound and Euro are dipping, the Dollar continues to thrive?
The answer to both these questions lies in a simple term that many will have already heard; USD is a safe haven currency.
Let’s dissect this statement.
Safe Haven: what does it mean?
As the name suggests, a safe haven is a trusted currency or commodity that is expected to keep its value, or increase in value even in times of extreme volatility.
When we hear that USD is a safe haven, it means that investors are taking refuge in this currency because situation with most of the other currencies is uncertain. A safe haven, thus, limits a trader’s exposure to risk. During time of extreme market volatility investors seek to convert to secure a stable asset for other volatile ones. It should also be stated here that USD isn’t the only safe haven under the sun. There are other safe havens too such as the swiss franc which tends to stay stable. Similarly Gold and certain crucial industry stocks are also included in the category.
Isn’t volatility helpful to the trader?
If one is a day trader and the volatility the market is offering is random then sure it can be helpful. More movement means there is more of a chance to make a profit.
However, that is not always the case. In times of economic recession like the ones we are living through right now due to the coronavirus, volatility usually means that assets are dwindling in their value. We already have witnessed a worst case scenario type of situation with WTI with its value touching the negative. In such times you are lucky if you find yourself having made the smart move of investing in a safe haven currency like the USD. It shields the traders against major losses.
Why is USD a safe haven currency?
We have already done another piece on the journey of USD to becoming what it is including the main factors that went into it. You can read that piece here if you like. There are a few reasons why USD is doing so well in this economic crisis and will most likely continue to do so in others as well:
⦁ The American Dollar (USD) is a reserve currency for a number of countries. This means that this is the currency they use to carry out all transaction globally.
⦁ The liquidity of USD. The dollar is the most widely used currency since many countries have adopted it as a complete or partial substitute currency. This widespread use of the USD and its acceptance on the global scale renders it trustworthy.
⦁ It is the result of high demand almost like a chicken and egg situation. Because investors believe that the United States Dollar is a safe haven, they flock to it thus increasing its demand. If you are familiar with the mechanism of supply and demand then you will know that higher the demand, higher the value. So investors want to increase their dollar reserve because it is stable, but also it’s stable because investors want to increase their dollar reserve.