Where can I hide with my money?

The US dollar seems to be losing its role as a safe haven in the currency world for a while. After reports of a new corona variant, the currency fell against the euro and the Swiss franc. But the Japanese yen in particular was a notable winner for a while.

The discovery of the new omikron variant has caused quite a stir in the world of currency as well as in the medical world. The price movements could be explained for a large part. For example, the South African rand fell to its lowest level against the dollar in more than a year. Omikron has emerged for the first time in South Africa, but the fact that the country is a major raw material exporter also plays a part. If it turns out that existing vaccines and new agents are less effective against this corona variant, this could lead to new lockdowns and decreasing use of raw materials. For the same reason, for example, the Australian dollar also fell.

Feint of the dollar
When uncertainty in the financial world increases, parties often seek the safety of the US dollar, Swiss franc and Japanese yen. But the former coin fell out of its roll at first. In fact, last week's fall against the franc was the largest in more than five years, while the dollar also lost ground against other currencies. The spread of the omikron variant casts a shadow over the economic recovery that is emerging in the United States. This makes it less certain that the Federal Reserve will gradually raise interest rates next year. And the currency world had already taken a big advance on that.

The surprising winner of omikron turmoil
Just before the discovery of the new virus variant, the dollar index had risen to its highest level in almost a year and a half. This index measures the strength of the US currency against a basket of other currencies. Incidentally, the currency limited the damage when Fed Chair Jerome Powell hinted that inflation may be less temporary than it appeared. This indicates that there is still a high probability that US interest rates will rise in the course of 2022. If it does, the dollar could make up for its loss in the near future against a surprise currency winner: the yen.

Sudden reversal
The Japanese currency had fallen about 9% against the dollar since the turn of the year. But after the omikron news, the yen rose 2,5% within a few days. This sudden turnaround says a lot about the importance of interest rate expectations in the currency world. The Japanese central bank is not making any plans to raise interest rates. There is little reason for this, given an expected economic growth of 2,6%. The global economy is growing more than twice as fast. The corona news therefore has no impact on interest rate expectations for Japan, unlike US interest rate expectations. The lack of interest rate potential makes the yen vulnerable if the omi currency fears are overblown. But if new virus variants exacerbate the pandemic, the Japanese currency could just be one of the winners in 2022.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.