Currencies

Scarcity of safe currencies is a growing problem

BUZZ-COMMENT-Scarcity of safe currencies is a growing problem

Feb 21 (Reuters)The scarcity of safe currencies is a growing problem with the yen effectively excluded from an already small pool of potentially safe assets. This lack of safer currencies has led to dollar rallies even when the source of worries fuelling risk aversion stems from the United States.

While that is illogical, the dollar’s status as a safe haven has grown now that it is supported by an interest rate greater than those for other major-traded currencies.

Having dropped to a record low last year, the yen – once deemed safe – can surely no longer be viewed safe, and those that have chosen to hold it would certainly have lost on those investments.

There are few alternates. The pound has never been regarded safe and like the yen, it has been falling over the long term. Investors have never been keen to hold the euro – the existence of which was in doubt not too long ago, while the yuan (currency of world’s second largest economy) isn’t even fully convertible. Switzerland’s franc and gold lack the liquidity needed to make them truly safe.

As a result nations are holding trillions of dollars in reserves that are much greater than the total of every other currency held when those are combined.

They are maintaining the size of these dollar holdings even while trying to stem declines in their own currencies, and because dollars sold to stem local currency drops are bought back, local currencies are remaining under pressure and may well fall further.

Although central banks have been seen selling dollars – or authorising sales on their behalf to support yuan, rupee and Turkish lira, all remain extremely weak while FX reserves are little changed.

The big issue for investors is that should an increasingly attractive dollar draw more buyers then there will be a point when investment in it becomes overcrowded, and then it too won’t be safe.

For more click on FXBUZ

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)

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