Francs And Yens In Safe Haven Status

Japanese yen and Swiss franc these are the outstanding candidates for safe haven status. Switch some holdings in to them, particularly from the Deutschmark. The reasoning behind these suggestions might as well start with the biggest currency charts free, the dollar. If the dollar is back in favor - and, comparatively speaking, it is - that's not because of intrinsic strengths within the US economy. The feeling remains that the authorities care little about the greenback's international value and that the recovery in the economy is anemic.

Anemic, but nevertheless there, and that makes it increasingly likely that the next move in US interest rates will be up. There is, therefore, some hope that the US economic environment may soon become a better one for dollar holders. Added to that is the effect on sentiment of a presidency, for that is the political commentators' assumption even if it isn't fully in the dollar's price.

One view says that president in the White House would mean higher interest rates, if only because the Federal Reserve will tighten its monetary policy in response to president’s looser fiscal policy; in other words, he'll spend more. Under those circumstances, higher interest rates might not necessarily feed through to a higher dollar. Quite likely however, that discussion is redundant because it is events in Europe that will power the dollar. That the German economy is slowing, and doing so rapidly, is beyond question. For example, real GDP fell in the second quarter, having risen by about 2 per cent in the first quarter. The pertinent question, though, is when will evidence of the faltering economy persuade the Bundesbank to cut interest rates?

The simple answer is, probably not till money supply growth slows. The M3 measure of money continued to grow rapidly in August (up 9 per cent on the year); although it is assumed that these figures are being distorted upwards because high short-term interest rates are causing some investors to switch from bonds to cash. Much attention will, therefore, focus on September's money supply figures, due out at the end of the month. Bundesbank watchers currently expect them to show no improvement on August's. The logical conclusion is that German rates won't come down in a hurry.

Even so, the longer term difference between US and German interest rates should still move in favor of the dollar. Besides, the Deutschmark will continue to be affected by uncertainties in the ERM. In that sense it doesn't matter that it is the strongest currency in the system; the very fact that it's part of a system in turmoil makes it less loved than the dollar and, more especially, than the Japanese yen and Swiss franc.

All that uncertainty is causing Japanese investors to repatriate overseas investments, a process that had started in the spring anyway, though for different reasons. True, Japanese interest rates are low and falling (a consequence of a sluggish economy), but yen investors do have the likelihood of better growth in 2006 as the first effects of the government's pounds 40bn stimulus begin to filter through. And on top of that there's the safe-haven status.