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By Chen Li
The global trade system is currently undergoing the most severe shock since World War II. On April 2, the "reciprocal tariff" policy led by the Trump administration officially took effect, immediately triggering a chain reaction in global markets. On April 3, the S&P 500 index plunged nearly 5%, marking its worst single-day performance since June 2020, with a loss of over USD 2.4 trillion in market value in just one day. The Nasdaq index also fell by 4% on April 4, officially entering a bear market, while the European STOXX 600 index dropped 2.7% on the same day.
The sharp fluctuations in the stock market reflect investors' panic, and in response to the uncertainty caused by tariff policies, many investors fled from high-risk assets such as stocks and shifted towards assets considered "safe havens." However, amid the turmoil in the stock market, funds are flowing into the bond market, and the yields on sovereign bonds in some countries are falling, reflecting the increased demand for risk aversion as uncertainty rises. After a significant depreciation, the U.S. dollar index rebounded to around 103, while the Swiss franc and Japanese yen showed strong performance. On April 7, the Japanese yen rose by 1% against the U.S. dollar, and the Swiss franc gained 0.7%. These changes indicate that investors are seeking lower-risk assets, with safe-haven currencies becoming refuges in times of turmoil due to their stability, low risk, and ability to preserve value during crises.
In financial markets, safe-haven currencies typically refer to those that maintain or appreciate in value during times of increased uncertainty. These currencies are often supported by stable economies or possess unique attributes that transcend the policies of a single country. Common safe-haven currencies include the U.S. dollar (USD), Japanese yen (JPY), Swiss franc (CHF), and gold (XAU). The U.S. dollar, due to its status as the global reserve currency and its good liquidity, often attracts capital during economic crises because of the "cash is king" advantage. On the other hand, the Japanese yen, thanks to Japan's low-interest-rate environment, current account surplus, and economic resilience, is a commonly chosen diversified safe-haven currency. Meanwhile, when it comes to the Swiss franc, because of its political neutrality, low debt levels, and stable financial system, is considered a safe-haven currency. Gold, although not a fiat currency, is often treated as "money" due to its special "gold standard" properties, making it a common safe-haven asset. Its value-preserving attribute, independent of government policies, often attracts large amounts of capital during market collapses. Although they are all considered safe-haven currencies, these currencies exhibit different investment logics in complex financial and geopolitical environments, and it is worth exploring which currencies can effectively play the role of a safe haven during the current turbulence.
Firstly, as the world's primary currency for trade and reserves, the U.S. dollar has the strongest liquidity, making it the preferred safe haven for capital during crises. Currently, against the backdrop of the U.S. initiating a trade war, the dollar continues to show strong appeal. Many capital investors have exited the American stock market and shifted into safer dollar assets, such as U.S. Treasury bonds. The relatively high coupon yields have attracted long-term funds, including sovereign wealth funds. Moreover, the Federal Reserve recently stated that it will keep interest rates unchanged in the near term, which has helped maintain the stability of the dollar and, in the short term, kept U.S. Treasury bonds attractive. According to data released by the U.S. Treasury in February, 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, mainly due to rising debt interest (up USD 45 billion) and social security (up USD 38 billion). This fiscal expansion, combined with the potential for interest rate cuts by the Fed, has heightened concerns about the creditworthiness of the dollar. Meanwhile, the risk of stagflation in the U.S. economy continues to accumulate. In March, the Consumer Confidence Index dropped to a two-year low, while the core PCE inflation rate in February reached 2.8%. Trump's tariff policies could push inflation up by an additional 0.5-1 percentage points, further weakening the inherent attributes of the dollar. In the long term, as American economic growth slows and the Fed potentially cuts interest rates, the dollar is likely to depreciate. After short-term risks subside, funds may still seek diversified allocations.
Compared to the dollar, the yen's safe-haven attributes are currently strengthened by multiple factors. Traditionally, the yen has been a major financing currency for global carry trades due to Japan's long-standing zero or even negative interest rate policies, and investors borrow low-cost yen to buy high-yield assets. Currently, with the Bank of Japan (BOJ) continuing to raise interest rates, the cost of yen funding is rising, and the unwinding effect of the currency carry trades is becoming apparent. As the interest rate differential between U.S. and Japanese government bonds narrowed from 350 basis points in 2024 to about 250 basis points now, hedge funds have significantly reduced their short positions in the yen. The exchange rate of USD/JPY has appreciated from JPY 161.95 in July last year to around JPY 150. Goldman Sachs forecasts that if the probability of a U.S. recession increases, the yen could appreciate further to JPY 140, a 7% upside from current levels. Secondly, as the BOJ gradually moves away from its quantitative easing policies, the "carry yield" of yen assets has significantly improved. The market widely expects the Japanese central bank to raise rates by 25 basis points to 0.5% in April, and some institutions even predict that rates could rise to 1.0% by the end of the year. For this reason, yen liquidity is continuously increasing. According to Traders Union data, the daily trading volume of the yen is USD 1.25 trillion, accounting for about 16.7% of global forex trading, and it is also the third-largest reserve currency, which is about 4.9% of global currency reserves. In contrast, the dollar's share in global reserve currencies has declined for five consecutive quarters. The Japanese economy has achieved an annualized growth rate of 2.2% in the fourth quarter of 2024. Although below expectations, the recovery in the services sector was strong, with tourism revenue as a share of GDP rising to 7.5%. This domestic demand-driven economic structure makes Japan less sensitive to trade wars compared to export-oriented economies. From a geopolitical perspective, the yen's low correlation with the European economy also makes it an important tool for hedging risks.
The Swiss franc is another safe-haven currency worth paying attention to. Particularly after the Swiss National Bank (SNB) cut interest rates, its interest rate level has fallen below that of the yen. With the EU economy under pressure due to the 20% tariffs from the U.S., Switzerland has become an ideal destination for funds fleeing the eurozone. For example, during the European debt crisis in 2011, the Swiss franc saw a significant appreciation. Now, with the trade war spilling over into Europe, a similar trend could reoccur. However, the Swiss franc also faces limitations. The SNB has always been cautious about rapid currency appreciation and may intervene to limit the increase. Additionally, compared to the dollar and yen, the Swiss franc's market size and liquidity are smaller, making it more suitable for regional rather than global safe-haven demands.
Gold, as a unique form of safe-haven asset, deserves separate analysis. Although gold is not a traditional currency, its performance during crises has led to it being regarded as a "borderless currency". Amidst stock market crashes, rising inflation expectations, and escalating trade wars, the price of gold has surpassed USD 3100 per ounce, with an increase of more than 18% since the beginning of the year. Data from the end of March showed that gold deliveries on the New York Commodities Exchange (COMEX) reached 44.5 million ounces, reflecting the panic-driven behavior of investors and institutions hoarding gold during times of turmoil. Gold's unique advantage lies in its non-legislative nature, meaning it is not influenced by the policies of any single government, and serves as a natural hedge against inflation and currency devaluation. However, gold also has its shortcomings, such as not generating income, experiencing larger short-term price fluctuations, and having lower liquidity compared to fiat currencies. For investors, gold is better suited as a supplement to an investment portfolio rather than the primary safe-haven asset.
Overall, the yen demonstrates a stronger safe-haven logic in the current environment. Its advantages are reflected in three aspects: first, the expectation of monetary policy normalization provides a clear catalyst for appreciation; second, the unwinding of carry trades and the geopolitical risk premium create dual support; and third, the domestically-driven nature of the Japanese economy reduces the impact of external shocks. The dollar still holds an advantage in terms of liquidity and its status as a reserve currency, maintaining strong appeal. In times of liquidity risk in the market, it remains the preferred safe-haven currency. However, the dollar has been complicated by U.S. domestic policies, especially with the current risk of stagflation, which could weaken its long-term safe-haven function. Among non-currency safe-haven assets, the allocation value of gold should also not be overlooked, as its negative correlation with sovereign currencies can effectively diversify risk.
Final analysis conclusion:
Amid the escalating global trade turmoil, the U.S. dollar's safe-haven status remains solid, but it is constrained by domestic economic stagflation and fiscal risks. In contrast, the yen, supported by policy normalization, carry trade unwinding, and domestic demand, shows stronger safe-haven advantages. Gold, as a "borderless asset", provides investors with an important risk-hedging tool beyond currency-based safe-haven assets.
- Chen Li is an Economic Research Fellow at ANBOUND, an independent think tank.