Investors who want to try their hand at the currency market often wonder which currencies are profitable and safe and which can lead to financial losses? It is worth to look for an answer to the question – how to invest safely in currencies?
What is a safe currency?
A safe currency is a one which belongs to the safe haven. In order to become a “safe haven” for an investor, an asset must have high liquidity and low investment risk. While liquidity is usually not a problem, the determination of risk is often not obvious at first sight.
So how is the investment risk in relation to currencies determined?
A low-risk currency is issued by an economically and politically stable state. A country with a strong economy, low debt and no recent problems with inflation. The risk factor is also reduced by state reserves and the strong position of export in the economy, especially when it comes to natural resources.
How to recognize a safe currency?
To begin with, one should reject countries that are politically unstable, heavily indebted or have inflation that is rising too fast. An example is the history of the Zimbabwe dollar (ZWD).
Zimbabwe is a country that did not meet any criteria for issuing a safe currency. It was a politically and economically unstable state, led by a dictatorship. At one point, due to a collapse in exports, the currency fell into one of the largest hyperinflation rates in history, amounting to 79 trillion percent per year. As a result, the Zimbabwe dollar has been dominated twice, but due to the lack of real government action, inflation continued. This situation has led to Zimbabwe’s currency being withdrawn and replaced by the US dollar, which has become the only legal tender in the country. This history proves that currencies of exotic countries can be a very dangerous asset.
That’s not all. When looking for a secure currency, it is worthwhile to analyse the combination of strong and weak features of given currencies of countries enjoying a stable situation. These analyses can be found among the current reports of brokers and economists often made available online. Safe currencies may be the ones from the first seven most popular currency pairs, i.e. those issued by highly developed countries with a stable institutional situation, strong export and internal economy. Choosing the stable currency pairs may not always result in a big profit, however it is more safe than exotic currencies.
What can you invest in, i.e. ranking of safe currencies
The currency market usually does not undergo rapid changes, especially in case of the currencies of economically and politically stable countries. However, this is not the rule, because every market can go through an unexpected collapse. It is therefore worth knowing which countries have relatively safe currencies.
The currencies of Scandinavian countries, i.e. Norwegian, Swedish and Danish krones, are very good. Northern European countries are considered stable because they have a competitive economy and a large surplus of reserves. They are also countries in the lead when it comes to public trust and institutional stability.
It is worth to consider also Asian tigers. One of them is Japan, which is at the forefront of international economic development, thanks to which its yen has been considered the safest currency for years. Asian tigers tend to dominate productivity, making them one of the largest exporters on the international market.
The price also includes the currencies of resource countries such as Canada, Australia or Saudi Arabia, which currently exports almost a quarter of the world’s oil reserves. The strength of these countries is based on the high importance of natural resources for the economy.
The European currency is doing well, even despite the crisis of some countries and the Brexit. This is due to the high stability of the European Union, which translates into Euro liquidity. The US dollar, on the other hand, did not catch on the podium because of the very weak federal reserves and low confidence in the new president.
There is also Polish złoty, which still holds a low position. This currency has been considered a weak asset for years. Its situation was further aggravated by the fears of foreign investors caused by the policy of our country.
Which currencies is it worth to invest in?
It depends on the investor’s predictions. Not every safe currency may be profitable. The reason is that safety usually means stability, i.e. no sudden change in value.
There may be many answers to the question: what is worth investing in? Some see the increase in Saudi Arabia’s influence in the expected increase in oil prices, others see the spectacular strengthening of China’s economy. These types of changes will surely be important when the currency is decreasing or increasing in importance.
Finally, the decision to invest in currencies depends on speculation about the future fate of the issuing countries. If someone values stability in times of crisis, they will bet on the Swedish or Norwegian krone. If, on the other hand, they see profit in the strengthening economy and exports, a good choice will be yen or Chinese yuan.