hi all.
if theres uncertanity in world economy, why do people invest in low yeilding currency such as dollar and yen. as said in school of pipsology.
why are the low interest rate currency safe havens?
It is not so much that the [I]“low interest rate currencies are safe havens”[/I] as it is that “[I]safe havens have low interest rates.”
[/I]In times of uncertainty, investors will seek investments that are safer since protection of actual capital is even more important than the rate of return. But this issue is two-sided. There is also the borrower, and of course a borrower who is a safer risk will not (have to) pay as high a rate of interest as a borrower with a higher risk.
Risk and reward go hand in hand. If you are a lender and two borrowers offer the same rate of interest, you will lend to the one that is least risk. Therefore a borrower will not expect to pay out as much for a loan as another borrower who is a greater risk.
So when investors seek security by transferring funds to a safe haven, they do not expect to get as high a return because of the very fact that it[I] is[/I] a safer risk. Equally, a more risky borrower, be it corporate or national, will know they have to pay a higher rate of interest to attract investors. The bigger the risk, the juicier the carrot must be…
This is just a simplified overview, however. Interest rate levels are affected by many factors, of which the risk factor is but one, albeit at times a major one…