What Makes a Safe-Haven Currency Safe?

Why do some currencies systematically appreciate when global risk rises? This paper argues that safe-haven status reflects a macro-financial transmission mechanism. Higher global uncertainty raises precautionary savings and reallocates portfolios toward assets that provide a better hedge, raising their relative prices, directing capital flows toward them, and appreciating the currency in which they are denominated. We document these dynamics in Swiss data and develop a simple open-economy New Keynesian model with internationally active intermediaries and balance-sheet constraints that reproduces them. The mechanism is that financial frictions make uncertainty-induced portfolio reallocation asymmetric across countries, so that some assets absorb more demand and command lower expected returns. In the Swiss calibration, higher relative productivity triggers the mechanism. We provide suggestive empirical evidence of a positive correlation between safe-haven strength and relative productivity. Japan is a boundary case. A Japanese calibration with lower relative productivity reverses the mechanism under symmetric leverage, but safe-haven dynamics are restored when the calibration incorporates higher Japanese intermediary leverage. Finally, we show that the same underlying mechanism implies a persistent low-rate bias in safe-haven economies.