(Bloomberg) — The haven status of the dollar and the yen came under question in February, with both wobbling as the coronavirus outbreak threatens the two economies.
While the yen rebounded in the last week of the month, showing its historic correlation with market volatility, the dollar has continued to weaken. A closer look at some of the fundamentals though suggest that the greenback should reign as haven supreme if the virus-driven risk aversion turns into panic.
Here’s a look at four key factors:
The dollar’s haven status is most evident in the foreign-exchange holdings of global reserve managers, among the most conservative investors in the world. The greenback accounted for 62% of total holdings, compared with 20% for the euro and just 6% for the yen, according to the latest data from the International Monetary Fund.
“If risk aversion turns into market panic, the dollar will live up to its safe haven status again,” Georgette Boele, a senior foreign-exchange strategist at ABN Amro Bank NV in Amsterdam, wrote in a note Thursday. “At times of panic, cash in a liquid currency or U.S. Treasuries are the most sought after investments.”
The extensive use of the dollar in everything from international trade to commodity pricing to foreign-exchange transactions shows the greenback is a must-have currency not only for investors but also for businesses and official entities.
The dollar’s share in global foreign-exchange turnover is more than five times the yen’s and almost three times the euro, according to data from the Bank for International Settlements.
The U.S. currency also offers the most liquid bond market in the world, meaning that currency holders have no difficulty in parking their cash.
Net International Investment Position
One factor in favor of the yen is Japan’s position as the world’s biggest creditor, helping the currency rally whenever Japanese investors liquidate overseas holding and repatriate the cash. The U.S. is at the other end of the scale, according to data from the IMF, meaning there’s little impact from repatriation flows.
|Net International Investment Positions ($ trillion)|
Still, Japan’s position as the world’s most indebted developed nation means its net international investment position can’t be chalked up as a clear victory for the yen.
“We have never regarded the yen as a safe asset,” Makoto Noji, chief currency and foreign bond strategist for SMBC Nikko Securities Inc. in Tokyo, wrote in a research note. “Given Japan’s fiscal deficits and the lack of measures to finance its debt as population ages, its currency can’t be seen as a haven.”
Another key factor in favor of the U.S. currency is that Treasuries are seen as the world’s best risk-free asset and yet still yield more than their European and Japanese counterparts. Even after its fall to record lows, the yield on the 10-year Treasury benchmark is well over one percentage point above these peers.