Why do some currencies rise when everything else is falling?
In calm markets, currencies mostly trade their own rate differentials. In frightened markets, they sort themselves into two buckets and the differentials stop mattering. The buckets have names — risk-on and risk-off — and the sorting is real, well documented, and frequently misunderstood as a property of the currencies themselves.
What the two regimes look like
In a risk-on regime, capital moves toward higher expected return: equities rise, credit spreads tighten, high-yield and commodity currencies strengthen, funding currencies weaken. In a risk-off regime, everything reverses, and it reverses in a correlated block — the distinctive feature of stress is that things which normally move independently suddenly move together.
The classic FX barometer of this is AUD/JPY: a high-yield commodity currency over a funding currency, which makes it about as pure a risk-appetite instrument as spot FX offers.
The three currencies that go up
The yen. Three mechanisms stack, and they are independent of each other. Japan was the world's largest net creditor nation for 34 years and is second only to Germany since the 2024 figures, so Japanese investors hold enormous foreign portfolios that can be repatriated or hedged home quickly. The yen is the archetypal funding currency, so global deleveraging mechanically requires buying yen back — the unwind of Unit 1. And Japan has had low, stable inflation and an enormous, deep domestic government bond market.
The Swiss franc. A persistent current-account surplus, a large net foreign asset position, political and institutional stability, and low inflation. The catch is size: Switzerland is a small economy with a small currency, so a modest global flow produces a violent Swiss move — which is exactly why the SNB has spent so much of the last fifteen years intervening.
The dollar. The largest and least intuitive of the three, because the dollar has risen in crises that originated in the United States. That is not a paradox once you understand the dollar's structural role, which is the subject of lesson three.
Why the sorting happens at all
The honest answer is that "safe haven" is not one mechanism but at least four, and different currencies get their status from different ones:
- Funding unwind. Deleveraging forces the purchase of whatever was borrowed. This is mechanical, not a judgement about safety.
- Repatriation and hedging. Domestic investors bring money home or raise hedge ratios on foreign assets.
- Depth of the safe asset market. Frightened money needs somewhere enormous to sit; only a few government bond markets qualify.
- Self-fulfilling convention. Everyone expects the currency to rise in a crisis, so they buy it in a crisis, so it rises.
The caveat that matters most
Safe-haven behaviour is a regularity, not a property. It can and does fail.
The clearest counterexample is 2022. It was a year of considerable global stress — war in Europe, an energy shock, the fastest tightening cycle in four decades — and the yen fell to multi-decade lows against the dollar, moving from around 115 in January to around 152 in October. The interest differential from Unit 3 simply overwhelmed the haven mechanism. A currency's crisis behaviour depends on what kind of crisis it is, and specifically on whether the shock is a risk shock or a rate shock.
This means correlations of the kind traders quote — "AUD/JPY tracks equities" — are estimates from a sample, not constants. They change regime, and they change fastest precisely when they are being relied upon.
Try it now
- Two long histories are below: the classic risk-on carry pair, and a broad equity index that tells you when the market was frightened. Switch both to Monthly and line them up.
- Identify three periods of sharp equity-market stress on the second chart, then Measure what the currency pair did across each of the same three windows. The two should fall together, and the currency pair should usually fall harder — that is the whole of "risk-off" in one comparison.
- Now find one period of stress where the pattern did not hold. Write one neutral sentence describing it, and one naming which of the four mechanisms above was overwhelmed.