ETF Talk: Does the Yen Offer a Safe Haven?

If you are concerned that the stock market’s rise in recent months could be running out of steam, you may want to consider protecting yourself by making a short-term investment in a stable foreign currency, such as the Japanese yen.

With the yen appreciating in the face of a weakening U.S. dollar, the Japanese currency could be considered a relatively safe way to protect your money and to give you a chance for a bit of appreciation if stocks pull back significantly. Currency investments typically do not make you rich. However, they do offer a way to invest that is not directly correlated with the direction of the equity markets.

You do not need to think back any further than last fall’s steep market drop to appreciate the value of owning a short-term investment that allows you to sleep at night. Even though the Dow retreated Wednesday, Thursday and Friday last week, the CurrencyShares Japanese Yen Trust (FXY) exchange-traded fund (ETF) closed up during that three-day period. It also rose again Monday, as it strengthened against the weakening U.S. dollar, even as the market advanced.

Signs of a subdued economic recovery pushed investors out of stocks last Thursday and into safer assets such as the Japanese yen and the U.S. dollar. On a day when the Dow slid over 93 points, or .9%, to fall to 10,332.44, the CurrencyShares Japanese Yen Trust rose .37% to $111.50. With the Dow closing down last Friday an additional 14.28 points, dipping .14% to 10,318.16, FXY rose a penny to $111.51. It climbed again Monday to $111.60. 

Clearly, the yen offers a way to avoid the fallout of short-term equity pull backs and also lets you escape the downward draft of the dollar. 

The dollar traditionally is a currency that is viewed as a source of safety when the markets flounder. With U.S. interest rates about as low as they can go, the dollar is losing value, while the yen and selected other currencies are appreciating. The preceding chart gives a graphic indication of FXY’s upward trend.

With U.S. interest rates among the lowest in the world, U.S. investors who seek the highest rates of return can put their money in foreign currencies such as the yen. This so-called “carry trade” activity further depresses the dollar and boosts the yen. Of course, this situation can reverse, so you need to monitor currency fluctuations closely.

For now, the yen is gaining value. Indeed, the Bank of Japan reported on Nov. 20 that the country’s economy is picking up due to various policy measures taken domestically and abroad. An improving Japanese economy further buoys the yen.

In bull markets, the yen tends to lag behind. In unstable markets, the yen is a defensive buy. 

For those of you who want advice about which ETFs to buy and sell, check out my ETF Trader service by clicking here. As always, I am pleased to answer your questions about ETFs. To send me a question, please click here. You may just see your question featured in a future ETF Talk.