With all the news about the war in Ukraine dominating headlines at the moment, there’s never been a better time to analyze the reasons why traders turn to safe havens. The current conflict has seen traders turn to the US dollar, with one measure of its popularity among traders suggesting that it is now at its most popular since the summer of 2020.
But what are the other possible triggers for moves to safe havens? These are wide-ranging and can include anything from remarks made by central bank executives to the results of elections. This blog post will look at what makes forex traders make the moves they do and what types of news stories can trigger big moves in the markets.
Results of elections
Safe havens can become more popular when elections with particular outcomes are held. The markets, just like electorates, have their preferences when it comes to choosing governments. Markets often prefer governments and political parties which have confirmed that they will uphold the established market order. As a result, parties that don’t plan to move towards protectionist or socialist politics are perhaps less likely to trigger a turn to safe havens than those that are. That’s why it’s so important to track the latest forex market news at a well-known site such as Leaprate.
Of course, sometimes countries that have safe haven currencies themselves experience a dramatic turn in political allegiance. The US, for example, experienced this when Donald Trump was elected in 2016: his semi-protectionist policies were interpreted by some traders as a problematic move. However, the fact that the US dollar managed to sustain its position as a haven in the years after Trump’s election indicates many factors are at play when determining which currencies are safe havens and what needs to happen for traders to turn to them.
Wars and conflicts
Another cause of turning to safe havens is due to war. The most recent example, of course, has been the war in Ukraine. It has led to the US dollar index, developed by Bloomberg to track the greenback’s performance against several other global currencies, to reach its best performance since July 2020. For the dollar, this could trigger even more demand: it could, for example, lead to interest rates in the country shooting up, which could enhance the dollar’s performance by pushing up demand for fixed income assets in the country.
One of the reasons why so many traders are keen to turn to safe havens during times of trouble is that it can put domestic or weaker currencies in peril. Some may fear that the war in Ukraine might have knock-on effects for the energy market in Europe, for example, which could destabilize the euro. But because the US dollar is a reserve currency for so many countries, demand to buy and hold it is predicted by many to be likely to be there always.
Central bank announcements
Finally, it’s sometimes also the case that traders move towards safe havens if a central bank changes an established monetary policy. The forex markets tend to prefer an economic policy that leads to higher interest rates, so if there is a rise in interest rates outside of the save haven world, then safe havens are perhaps less likely to be in fashion.
However, this is not a golden rule – and traders should not expect always to be able to bank on it. There are so many other factors at play when it comes to triggering a move towards safe havens – and it makes sense to understand this as just one of many potential factors in a long list and instead take a holistic view of all the different possible causes.
Overall, turning to safe havens is not uncommon at a time of upheaval in the financial markets. As the current crisis in Ukraine has shown, traders are keen to ensure that their investments are protected when problems arise in the world. Going to safe havens like the US dollar reduces the risk that the value of the currency investments will be wiped out. But this is far from the only trigger towards safe havens; it can also happen when countries hold elections that may cause instability, for example, and when central bank announcements take place.