What's the Safest Base Currency?

Here's an interesting question for discussion/debate. I get asked this one quite frequently, so I thought I'd put it out to the group for your input & insights. After all, I'd hate to think I'm giving people one-sided answers based upon my own (mis)perceptions.

Out of the following, what is likely to be the safest base currency for forex accounts to be denominated in over the next few years: USD, EUR, GBP, CAD, JPY? (I know currently AUD and NZD look the strongest, but not everyone offers them.)

Here's my take:

USD: Obviously taking a tumble, one that's perhaps long overdue. Some argue we're at the bottom so it can only go up from here. But... a budget deficit which continues to break all world records and is currently over 6% of the GDP is worrysome. The economy is far from healed (and housing shows NO signs of improvement). Many are waiting for shoe #2 to drop. And what happens if oil is no longer priced in Dollars or more countries begin to adopt a new reserve currency? (Some have already, on both counts.)

CAD: Canada shows some promise. After all - they have oil, and everyone else wants some. But you don't often hear discussions about oil or reserves being priced in CAD, and the monthly chart currently has quite a kangaroo tail (plus many other signs of reversal). And what if the Amero turns out to be more than rumor? Then you're right back to dealing with the USD issues (assuming CAD is not already feeling the weight of them).

JPY: The monthly chart looks the safest - we're in a tight rage and don't have the wild swings of any of the other currencies. But what happens when that range breaks? Applying the old saying "if the country was a company, would you buy its stock?", I'd have to say I'm not very impressed by the current product offerings, pipeline, or future prospects. Plus they import all their oil and are facing growing competition on their exports from China, Korea, and several other places.

That brings us to the last two choices:

EUR: Many think the Euro might replace the USD as either reserve currency or oil pricing base, or both (added demand). 2nd most frequently traded currently, 2nd largest liquidity. Deficit has been shrinking steadily since 2001, currently 0.3% of GDP. Used in 15+ countries, pegged by another 10 (diversification, not reliant on a single economy). Should fare well in the new "green" economy. That's the good part, now the bad. Just completed an 8-year-long Fib pattern and is WAY overdue for a correction (overbought for 24 months). ECB has pledged to intervene at levels above 1.60. Yes, they're growing and adding countries - but which countries? May strain the economy rather than help it. Risk of political instability also. May be safer over the longer run, but will obviously drop some in the more immediate term, likely worrying clients.

GBP: Currently holds slot #3 as most often used reserve currency, slot #4 in terms of trading & liquidity (after JPY). Deficit has been steadily growing since 2000, with the exception of Q1 2008 due to BoE interference. Current deficit is 2.8% of GDP, but last year's was nearly that of US. Used in only 1 country, has 3 more which are pegged to it (technically neighboring islands - "countries" is a bit of a stretch). Dependant upon a single economy only. Certainly not "exciting" - but we're not after exciting, we're after stable. BoE certainly invented central banking and is the oldest in the world. They've been around the block and know how to deal with crisis. Technically, the monthly G/U chart just broke above major resistance which also passed the test as support, and Fibs say plenty of room left for growth the next 2-3 years. Additionally, the EUR/GBP monthly chart favors the GBP as well. But what happens after that? What are the competitive prospects? Well, UK also has a very forward-looking and "green" economy developing, and they also have a bit of oil (North Sea). Anything else?

And... so... I'm left wondering. The fundamentals (and logic) certainly seem to favor the Euro, but the Sterling looks far better from a technical & historical perspective.

What would you do?

They are ALL safe. I guess you didn't hear about the Ukraine dollar that lost 40,000% of it's value (in 2 years). Loosing 1/2 the value , is absolutely nothing.

Sure... everything's relative. But which of these would you personally choose today if you were opening a new account?

The currency I use day-to-day.

Fair enough... thanks!

The safest currency is the swiss franc, the australian dollar, the canadian dollar, new zealand dollar. Less people in the countries, less powerful countries.

Yes, the safest currency would be the one you use day-to day.

Since you already place speculative trades in forex, there is no need to place a speculative trade on which way the currency in your account is going to go. Unless of course you can somehow predict which currency can appreciate over the long-term.

I live in the U.S. so I would use the USD and I wouldn't care if it depreciated 20% this year. Sure if I go on at trip to europe it will seem really expensive, but unless I have a business dealing with foreign currencies and need to perform hedge transactions I wouldn't care where the dollar went. The domestic inflation rate is more important than how much the dollar depreciates on the foreign exchange, in regards to the impact on my cost of living.

Bottom line is just trade the system you have developed, and don't worry too much about which currency your account is denominated in. Most major central banks nowadays are able to keep the domestic inflation rate at a low level.

If you're looking to preserve your wealth, then most wealth management funds diversify currency holdings. They hold a basket of currencies. Many businesses and businessmen do that, and has served well over economic downturns that may arise over certain parts of the world. But remember, this is just so that you don't have too much of an adverse affect to currency depreciation so its like a hedge. Thats the best way to protect an account, through diversification.

If on the other hand you are looking for appreciation of your base currency holding more than just as a hedge, then you can't just look into economies as being strong or weak and invest as such. Currencies are more complicated, sometimes a weak currency is preferred to help a nation's economy and sometimes a strong currency is undesireable to keep an economy strong, a good example would be the Euro. Govenments are always controlling how the currency markets value the currency as it directly involves the economy so its not really a free market, there's alot of intervention that goes on.

All the currencies you've mentioned above are i think best suited for basket currencies, but I'm surprised you don't have the CHF in there, I think if you'd like to hold a currency as a base, the CHF should be at the top of your consideration choices among the most liquid pairs. Also, some of the exotics like the chinese yuan, and the Indian rupee should be given a strong look to hold as the fundamentals of those currencies to keep from depreciating look better than their european counterparts.

Sorry for the lengthy post but I wanted to give you a broader outlook on what to look for and consider..

Ron

I understand its easy to think that way, that if the dollar depreciates it doesn't affect us really. But it really does, cause most of the goods purchased in America are imported, so when the dollar depreciates, it does affect you as you're going to end up paying more for the things you buy as it costs you more to buy a benz, or corolla or what have you. The domestic inflation rate is more important, I understand, but they are all related, and you can't buy the the bullshit numbers the BLS spits out nowadays to you anyway about inflation, because they constantly change on how they calculate it. You are paying 3.50 a gallon for gas, when i had my first car in 97, i paid 1.28, and thats just gas mind you. All this spills over into the economy eventually, its just business, someone has to pay for the cost, if US business paying 20 percent more to buy the same goods, the consumer ends up bearing that in the end..

grkfx and megamo - thank you both for your insightful replies.

My reason for asking is two-fold... for one, I get asked this question probably more often than anything else. And while I have my opinions (listed above), I also like to do a reality-check before dispensing information/advice to others.

Second, I manage funds for people from all over the world. So while it's true that inflation affects you much more than exchange rates while you're at home, I'm also asking people to exchange their "home" currency when they deposit and then back again upon withdrawal (you cannot mix base currencies on my management platform), so I wanted to do my due diligence prior to making this switch. The broker's in the UK and I'm in Europe, hence those are among my top choices.

As I stated - CHF, AUD, and NZD would be my personal choices (and what I use currently on my personal savings accounts) - but those aren't among the choices. Wouldn't need to post the question if they were.

Euope's well known for meddling (can we say 1.60... heh). How has the UK's recent history been?

Thanks again!

Well then if you are managing funds for people, it would be a little bit of a different issue since the origin of funds and what the cross rate is affects them more than what the daily major cross volatility is. Since your broker is in the UK, and assuming you cannot hold funds in your broker account in chf, i would be with the gbp as the Euro we know has been intervened above the 1.60 level so i think the pair may get into a range sort of situation which if you're holding your funds are not bad, and the gbp already has dipped plus it has a good interest rate so holding the funds in the gbp may be the best choice with the given scenario. If the size of your portfolio is large and you are really concerned with the currency depreciation, some options strategies can be utilized to give you that protection. You may want to do some research in that part in that case.

I never meant to say that the dollar depreciating doesn't affect us. What I mean is that even if the dollar depreciates substantially, the inflationary affect that it has is far less than what you would expect.

Some companies have hedged, will cut costs, increase efficiency and/or bear some brunt of the shift in the exchange rate in order to not lose their market share in the U.S.

Most of the inflation today is concentrated in food and energy prices, and these only make up a portion of consumer spending. There are plenty of products which are still dirt cheap which have not been noticeably affected by years of dollar depreciation. There is a lot of structural efficiency within the U.S. economy so the pass through effects to the consumer are not felt as strongly as in other countries.



Who intervened exactly? Central banks from the G7?
As far as I can remember the G7 just stepped up their rhetoric regarding "excessive forex volatility" , the didn't actually become a market participant and started shorting EUR/USD

Thanks for the confirmation, megamo - more or less my thinking too.

The ECB and BoJ have formed a concorcium and vowed to "protect" the EUR at 1.60 and the JPY at 95.00

If I had a broker that offered Yaun for base currency, I would make that my base currency. Unfortunately there doesn't seem to be any?

Since this treat is 2 years old, could someone post an update on his picks about the best base currency?
Especially what do you think about EUR? (Since I'm living in Europe)?

Why not CHF?

CAD because of oil, lumber and gold aswell as proper banking system

Can someone in the know please post a well informed, updated and educated response to this thread's question? For anyone who is planning to open a large forex account or to protect capital, the answer to this question is very important for future security: Out of the following, what is likely to be the safest base currency for forex accounts to be denominated in over the next few years: USD, EUR, GBP, CAD, JPY?

Looking forward to an enlightening reply.

offcourse I will choose USD. Because..


USD as the Base Currency
USD/XXX is traded in amounts denominated in USD. Standard lot sizes are 100,000 USD and mini lot sizes are 10,000 USD.
The pip value, which is denominated in XXX, is calculated by dividing 1 pip of the USD/XXX, which would be 0.0001 or 0.01 depending on the pair being talked about, by the USD/XXX current rate.
Profit and loss are denominated in XXX. For one standard lot position size, each pip movement is worth 10 XXX. For one mini lot position size, each pip movement is worth 1 XXX. For example, if one pip is equal to 0.0001 and the current exchange rate of USD/XXX is 1.4000, one pip of one standard lot would equate to 14 USD.
Margin calculations are based in US dollars. With a leverage of 100:1, 1,000 USD is needed to trade 100,000 USD/CAD.
USD as the Quote Currency
XXX/USD is traded in amounts denominated in XXX. Standard lot sizes are 100,000 XXX and mini lot sizes are 10,000 XXX.
The pip value, which is denominated in US dollars, is calculated by dividing 1 pip of the XXX/USD (0.0001 or 0.01 depending on the pair) by the XXX/USD's current rate.
Profit and loss are denominated in U.S. dollars. For one standard lot position size, each pip movement is worth 10 USD. For one mini lot position size, each pip movement is worth 1 USD.
Margin calculations are based in US dollars. For example, if the current XXX/USD rate is 0.8900 and the leverage is 100:1, 890 USD is needed in available margin to be able to trade on standard lot of 100,000 XXX. However, the as the XXX/USD rate increases, a larger available margin in USD is required. Conversely, the lower the XXX/USD rate is, the less required available margin is needed.


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