In times of turmoil investors tend to run for the exits of equities and other risky assets. Some investors are happy simply to park assets in cash until the storm clouds clear, while others gravitate towards safe havens–asset classes that perform well when risk aversion is running high and equities fall out of favor. Gold is perhaps the best example of a safe haven, as demand for hard currency tends to spike when investors are concerned about the outlook for the global economy. The U.S. dollar has also historically maintained safe haven appeal, as investors view the greenback’s stability and status as the default reserve currency as appealing in times of increased volatility.
But some investors are beginning to wonder if the dollar’s reputation as a safe haven is no longer reflective of current pricing relationships. As rising geopolitical tensions have sent oil skyrocketing in recent weeks, the dollar has actually slipped against its major rivals, recently falling to a record low against the Swiss franc and tumbling against the yen as well. There are, of course, various theories about the dollar’s disappointing performance in an environment that should be ideal for safe havens. Many analysts are concerned that rising oil prices will lead to a transfer of wealth from oil importers (such as the U.S.) to sovereign wealth funds of oil exporters. That explanation makes sense with respect to the greenback’s recent struggles, but fails to explain why other currencies, such as the yen, have been performing quite well. Japan is one of the world’s largest oil importers; Saudi Arabia and the UAE supplied more than 50% of Japan’s crude oil needs in January, while Qatar and Iran were also major suppliers [see Middle East ETFs Under Pressure As Protests Intensify].
A more likely explanation for the dollar’s recent performance may be related to investor skepticism over the Fed’s stance on inflation. Fed chairman Ben Bernanke indicated to Congress this week that he doesn’t believe the recent surge in commodity prices will cause a permanent increase in inflation, suggesting a “temporary and relatively modest increase in U.S. consumer price inflation” instead. Some believe that the Fed will ignore inflation and proceed with further QE programs aimed at stimulating growth. That development may put downward pressure on the greenback, and the possibility of such a scenario may be outweighing the traditional safe haven appeal in the current environment.
Dollar’s Loss = Franc’s Gain?
One of the major beneficiaries of the recent spike in oil prices has been the Swiss franc, which has climbed higher in recent sessions and is becoming more popular as a safe haven asset. The appeal of the Swiss currency is rooted in the relative stability of Switzerland, which stands apart from its European neighbors in terms of fiscal flexibility, economic potential, and debt burdens. The Swiss economy expanded by 0.9% in the fourth quarter of 2010, smashing expectations of 0.5% growth. Unemployment in Switzerland in January stood at just 3.5% on a seasonally-adjusted basis, a staggering rate considering the lack of job creation in the U.S. and countries such as Spain, where the jobless rate has approached 20% [see all the ETFs with Exposure to Spain].
Switzerland’s debt is about 28% of its GDP, well below the U.S. (60% and rising) and many of the euro zone countries (Italy came in above 118% in 2010 according to the CIA World Factbook). With concerns swirling about the very viability of the euro as a common currency and rising debt burdens weighing on the greenback and yen (Japan’s debt is more than 200% of GDP), Switzerland is one of the very few bright spots among developed markets. The country’s stable fiscal footing and impressive economic potential have made the currency an appealing asset for those seeking stability[see Switzerland ETF: Exposure To Europe's Bright Spot].
The strength of the Swiss franc as the euro plummeted last year became a problem for the economy, forcing the central bank to intervene to avoid too significant of an appreciation. A stronger franc makes Swiss exports more expensive to international consumers–a similar challenge faced by Japan over the last several years.
Swiss Franc ETF
Investors looking for exposure to Swiss equities gravitate towards the iShares MSCI Switzerland Index Fund (EWL), which has gained about 14% over the last year. There is also an ETF option for investors looking to establish exposure to the Swiss currency; the Rydex Swiss Franc Trust (FXF) is designed to track the price of the Swiss Franc relative to the U.S. dollar. Since the protests began in Egypt in late January, FXF has shown a strong negative correlation with the S&P 500 SPDR (SPY), essentially functioning as a hedge against tumbling global equity markets [Swiss Franc ETF Cleared For Takeoff].
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Disclosure: No positions at time of writing.