The role of being safe havens of USD and Japanese yen has recently been doubted as they were both affected as the coronavirus threatened the two economies. While the Japanese yen rebounded in the last week of the month, showing a historical correlation with market volatility, the dollar weakened. However, considering some rules, the green note still remains a top safe haven for investors who are confused because of the coronavirus.
The position of the USD is illustrated in the clearest with foreign exchange reserves funds of global reserve managers, who are among the most stubborn investors. The USD accounts for 62% in the total foreign exchange reserves, which is much higher than the 20% of the Euro, and the 6% of the Yen (according to the latest figures of the IMF).
“If a risk concern turns into confusion on the market, the USD will revert back to its role as a safe haven”, Georgette Boele, senior foreign exchange strategist at ABN Amro Bank NV in Amsterdam said. “In the time of crisis, this highly liquid cash or US Treasury bonds are the most sought-after investments. "
The widespread use of the dollar, from international transactions to commodity pricing and foreign exchange transactions, shows that the greenback is a currency not only required for investors but also for other businesses and organizations.
According to the figures from the BIS, the USD exchange rate in the global foreign exchange transactions is 5 times higher than that of the Yen and nearly 3 times higher than that of the Euro. On the bond market, bonds in USD are the most liquid. Bondholders can easily convert bonds into cash.
One factor that will benefit the Yen is Japan's largest creditors position, helping the currency to appreciate whenever Japanese investors want to liquidate assets abroad to withdraw cash. Meanwhile, according to data from the IMF, the US is on the opposite side, rarely affected by repatriation capital flows. However, Japan is the most indebted developing country, and its net international investment position is not a positive factor for the yen.
"We have never considered Japanese Yen as a safe asset," said Makoto Noji, SMBC's currency and bond strategist. "Japan has a fiscal deficit and lacks financial measures for its debts as the population ages, therefore the yen cannot be considered a safe haven."
Another important factor that benefits the US dollar is that US Treasury bonds are considered to be the best risk-free asset in the world and still bring higher returns than that of European countries and Japan. Even at a record low, the yield of 10-year US bonds is 1 percentage point higher than that of Europe and Japan.
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