Are there any safe currencies?

Investors are finding investing in currency increasingly difficult of late. Currency markets have been in turmoil since the financial crisis began and are not going to become stable anytime soon especially as the Euro recently hit a 15-month low against the dollar. The longer we wait for a European agreement on the Euro the more uncertain investors are that the currency will even continue to exist so are understandably unwilling to invest. So where should they put their money? The Sterling, Yen, Yuan, Krone? Or perhaps the answer lies further afield?

With strong exports and current account surpluses (meaning they export more than they import) it seemed the Swiss Franc and Japanese Yen were safe havens for currency investment until their central banks took measures to weaken their currencies as a way of boosting their economies. In August the Bank of Japan undertook its greatest monthly exchange intervention for 8 years which caused the value of the Yen to plummet 5% in one day – given that it had risen 5% over the year this was not a good news for investors. Similarly, the Swiss Bank reacted to the Swiss Franc soaring to its highest value against the Euro in August stating that it would buy Euros until the value of the Swiss Franc had fallen. So where can investors turn next?

The US dollar has been traditionally very faithful to currency investors, however times are changing. It has been a rocky year for the economic powerhouse although the dollar did manage to fight back against S&P’s rating downgrade in August 2011, the first time it had lost its AAA rating. Investors fled to US Treasuries following the economic turmoil in Europe. But, would you invest in a country’s currency that has $15 trillion worth of debt? Investors have not been deterred however as the thought of a US default is seemingly impossible. Even though the dollar ended the year over 5% down against the Yen, when compared to a basket of major currencies the US dollar looked set to finish up over 1%.

Despite making up just 1.3% of daily trade in the Forex market the Norwegian Krone is looking strong. To the envy of the rest of Europe, Norway has a current account surplus with oil being the major money maker. Hitting an 8½ year high against the Euro in September things were looking rosy. But Norway has expressed concern that the situation in the Eurozone will deteriorate the demand for Norwegian currency. This is because Norwegian exports to Europe are likely to fall as they re-enter recession and with the EU making up over 80% of Norway’s exports this will undoubtedly put pressure on the currency.

What about our own currency? From October to November £28.87bn was invested in UK gilts (bonds issued by the government), showing it to be a relatively safe haven. The 10 year yields then fell to 1.16% echoing views of investors that the UK is less risky and the sterling is a stable currency to invest in. Reassurance has been offered by the Bank of England’s £75bn quantitative easing measures. But we are still far from safe, with 2012 looking likely to be poor for the UK and European collapse likely, it is not a bright future.

An economy growing 2.5% this year, low levels of public debt with resilient construction and resources industry – that is what European dreams are made of. Australia’s seemingly recession proof economy may be the next haven for investors. Unlike Norway or Switzerland, Australia has diversified trading partners so is less likely to be affected by the slowdown in Europe and the US.

With the Euro potentially on the brink of collapse and currency markets uncertain, perhaps currencies aren’t the right place to be investing at all. Instability and global economic turndown are sure signs of investors turning to gold. It’s hardly surprising then that price of gold hit a record $1920/oz this year. The more the global economy is in turmoil the higher this will get, especially as China’s demand is set to rise 35% in 2012.

2012 looks set to be an unstable year for investors, with a lot depending on the outcome of the Euro. As further crises loom overhead it looks like their money will be getting as far away from the malign Eurozone as possible.