Yen, Euro and US dollar banknotes of various denominations.
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The Japanese yen and Swiss franc remain relatively safe bets, Morgan Stanley said on Tuesday, but the investment bank chose the U.S. dollar as the best safe currency in what remained of turbulent 2020.
The greenback fell to a 27-month low against a basket of its peers on Tuesday, where the dollar index hit 92.477 – a level not seen since May 2018, when investors took greater risk. The S&P 500 rose to its all-time high after regaining all coronavirus-related losses after rebounding more than 54% from the March low.
"We expect the US dollar (USD) to be the best safe haven currency, especially now that lower US rates make it a more attractive funding currency for carry trades," Morgan Stanley analysts wrote in a research note. Still, analysts expect risk sentiment to remain supported for the time being, so they said they will continue to hold the dollar "bearish".
Carry trades occur when investors borrow in a lower-yielding currency such as the dollar or the yen to fund investments in higher-yielding assets elsewhere and to receive interest. In times of uncertainty, investors can cash out these high-yielding assets and throw them back in the borrowed currency, which in turn can strengthen them. A weakening currency is central to the carry trade as investors will have to pay back less when they withdraw from the trade.
The world's reserve currency benefited earlier this year from general investor fear that drove the greenback to a three and a half year high in March as the coronavirus pandemic spread across the United States. As investors returned to fundamentals, the dollar has weakened against global currencies.
Some currency strategists have said that political uncertainties in the US, including a stalemate over the coronavirus stimulus, are also damaging the dollar.
"The longer the stalemate in DC continues, the greater the risk that the dollar sell-off will turn into a router," wrote Boris Schlossberg, managing director of BK Asset Management, in a statement on Tuesday.
Switching dynamics for yen, Swiss franc
While the yen and Swiss franc remain havens, their momentum is "shifting", according to analysts at Morgan Stanley.
“Recent correlation and flow analysis suggests that during times of investor anxiety,” the USD / JPY may even rebound, contrary to market perception. We find that during times of uncertainty, Japanese investors actually bought foreign assets and not have repatriated. "They said.
The yen has traditionally been viewed as a low-yielding currency as the Bank of Japan has historically had one of the lowest interest rates among developed countries. The short-term key interest rate is currently still negative. It was widely believed that policymakers are trying to maintain policies that contribute to the weakening of the yen.
The "appreciation potential of the Swiss franc is limited by the FX intervention of the Swiss National Bank", added the analysts from Morgan Stanley.