What are haven assets and what role do they play in times of uncertainty?

First modification: 09/03/2022 – 21:48

With global inflation, the war in Ukraine, lockdowns in China and aggressive monetary policies, investors are looking to protect their money in certain haven assets.

In this scenario, the market’s favorites are gold and the dollar, assets that have played a key role during the last economic crises, keeping investors’ money safe but pushing back other assets.

Also known as defensive assets, these are less exposed to the volatility of the market that is experienced these days.

“These types of assets that store or preserve capital are safe havens because the value that is placed on these assets does not depreciate. Normally, assets lose value either due to devaluation against strong currencies or due to inflation. Safe haven assets even they earn in times of inflation,” said Andrés Jiménez, co-founder of Fridom, an investment platform.

“Investors go to the assets that represent more security. For this reason, the dollar is one of the main ones, since 82% of international trade operations and transactions are in dollars and, moreover, they are backed by the North American economy,” Explain.

According to Jiménez, there are more safe haven assets such as the Japanese yen, the Swiss franc, or the United States treasury bonds, but among all of them, gold and the dollar are the ones that take the greatest rise in times in which the fear of a recession it is latent.

“When we compare the dollar, it must be analyzed with the reference currencies of the market. This year it has grown more than 14%, it has appreciated a lot due to the rise in interest rates. Having the capital has become more expensive, the rise in rates prevent dollars from being cheap,” he added.

The dollar, the world’s reserve currency

The strength of the dollar dates back to 1944, when the International Monetary Fund and the World Bank were created, since then it was agreed that the US dollar would be the world’s reserve currency. This agreement is known as the Bretton Woods Agreement and it officially made the dollar the most reliable currency.

The rise in interest rates by the United States Federal Reserve in an effort to contain inflation has favored the dollar, even leading the euro to touch parity. “Not only has the dollar appreciated too much, but other currencies have devalued,” says Jiménez.

But when the US dollar is at historical levels or exceeds them in the exchange rate with foreign currencies, it causes foreign countries to fall into economic problems. Countries like China, Japan and the UK lose value as the difference between exchange rates increases. In other words, it takes more of your specific currency to buy one US dollar.

with AP