USD is Not the Only Safe-Haven Currency

Trading safe havens is a diversification technique to protect portfolios against market downturns. Traditionally, the US dollar has been the most popular safe-haven currency. However, the greenback had declined 7.73% YTD by May 20, 2025, against a basket of major currencies. Inflationary fears, induced by the Trump tariffs, uncovered the fragility of investor confidence in this safe haven. While this does not mean that the USD is no longer a safe haven, it does highlight that overexposure to one asset is not good for the health of trading portfolios. 

With subdued global growth on the cards and supply chains at risk of disruption, forex traders need to identify alternative safe-haven currencies for a well-diversified portfolio. The good news is that USD isn’t the only safe-haven currency.

Understanding Safe-Haven Currencies 

While market dynamics play a significant role, investor perception is the key to making a currency a safe haven. Here’s a breakdown of how economic and political factors shape investor perception about a currency:

Economic Stability

Countries with a stable economy and consistent growth top investor preferences. The health of the country’s current-account balance and its fiscal policies create economic stability. These are the factors to keep an eye on:

Net Foreign Asset (NFA) Position

When a country owns more foreign assets and has fewer liabilities, it becomes a net creditor. This emphasises that the country is economically competitive and generates more wealth than it consumes, making it attractive during market turbulence.

Public Debt-to-GDP Ratio

Lower public debt relative to GDP suggests fiscal responsibility. This reduces the risk of default, making the currency more attractive to investors seeking safety. Now you know why US debt has been the talk of the town since 2024. It puts the currency’s evaluation and investor portfolios at risk.

Market Stability

Countries with deep, regulated, and liquid financial markets enable the free flow of capital. This makes the domestic currency an avenue of international interest. Here’s what to watch:

Bid-Ask Spread

Highly liquid currencies are easier to transact and offer narrower bid-ask spreads. High liquidity translates into lower spreads. These result in cost-effective transactions that are settled quickly. Trading with relatively lower spreads keeps trader anxiety at bay, especially during periods of market uncertainty.

Low Inflation 

Stable prices preserve a currency’s purchasing power, making it sought after during market turbulence.

Low Interest Rate

Historically, some currencies with low (and stable) interest rates remain high in demand for carry-trading and stability. The Japanese yen is a prime example. Such currencies are often considered safe havens during risk-off periods. This is because they are less susceptible to capital flight.

Political Stability

A stable and predictable political environment with strong institutions reduces the risk of policy shocks and enhances investor confidence. Keep an eye on:

Governance Strength 

Countries with robust legal systems, transparent governance, and consistent policy frameworks are perceived as less risky. This stability attracts investors during periods of global uncertainty.

Confidence in the Government

When the government loses the confidence of its people, the chances of pre-term elections and policy shocks increase. A trusted government may also return to office, keeping policies stable for longer.

Market Demand

Consistent and high international demand for a currency, often due to its role in trade and investment, supports its value during crises. Make sure you follow:

Reserve Currency Status

Currencies that serve as global reserves, such as the US dollar, earn a safe haven status. Widespread acceptance and trust reinforce this status. These currencies remain in high demand even during broader market declines. Plus, trading safe-haven currencies via contracts for difference (CFDs) allows forex traders to explore opportunities even when their value is declining.

The Lesser-Known Safe Havens

There are several alternative safe-haven currencies for forex traders to explore opportunities in:

Swiss Franc (CHF)

Switzerland’s political neutrality, robust financial system, and low debt levels give the CHF strong safe-haven appeal. By May 2025, the CHF/USD had surged 8.89% YTD, against the backdrop of tariff turmoil. During the Eurozone debt crisis as well, forex traders sought refuge in this pair.

Japanese Yen (JPY)

By the third week of May 2025, the USD/JPY declined nearly 8.50% YTD. The forces driving bullish momentum included the much-awaited policy reversal by the Bank of Japan (BOJ). The BOJ is the only central bank increasing interest rates, while most major economies chase monetary easing. Japan’s real GDP in Q4 2024 was 1.1% higher than that a year ago. Japan also has consistent current account surpluses and large foreign reserves, which preserve the yen’s safe-haven status.

Euro (EUR)

It is no secret that the EUR has reached parity with the USD in recent times. The EUR/USD had risen 8.53% YTD by May 2025. The euro is the official currency of 20 nations, including several G7 nations. This keeps the demand for the euro high, especially in sideways markets. However, a surge in sovereign debt across the Eurozone and internal geopolitical conflicts in the bloc may temporarily lower demand among forex traders.

Pound Sterling (GBP)

The British pound is another strong European currency that enjoys the status of a safe haven. However, the GBP has been more volatile and less attractive since Brexit. The GBP/USD had risen 6.60% YTD by the third week of May 2025. The pound sterling’s safe haven status is attributed to stable, and usually high, interest rates.

Bonus: Bitcoin

Although not a fiat currency, Bitcoin is an increasingly interesting trading avenue for safe-haven seekers. Despite high volatility, traders consider it a hedge against fiat market devaluations. So much so that even the US plans to develop a strategic reserve of the currency.

To Sum Up

• Safe-haven currencies belong to economically and politically stable countries. 
• Features, such as liquidity, legal certainty and stable interest rate, characterise safe-haven currencies.
• Forex traders consider the CHF, EUR, GBP and JPY as alternative safe havens to the USD.

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