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Risk Aversion

Risk aversion refers to when traders unload their positions in higher-yielding assets and move their funds in favor of safe-haven currencies. This normally happens in times of uncertainty and high volatility.

In the http://www.babypips.com/ forex market, currencies who have relatively higher interest rates are regarded as higher-yielding currencies. These are seen as “riskier” assets. Thus, in times of risk aversion, traders tend to unwind their positions in these currencies.

In turn, traders end up parking their assets in less risky, “safer” currencies, like the U.S. dollar or the Japanese yen. These currencies are regarded to be safer because of the size of their capital markets and liquidity.

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