Risk aversion refers to when traders unload their positions in higher-yielding assets and move their capital in favor of safe-haven currencies.
This normally happens in times of uncertainty and high volatility.
In the forex market, currencies that have relatively higher interest rates are regarded as higher-yielding currencies.
These currencies are seen as “riskier” assets.
In times of risk aversion, traders tend to sell their positions in these currencies.and buy “safe-haven” currencies.
Safe haven currencies are currencies that are expected to retain or increase in value when it seems like the world is coming to an end (geopolitical stress).
The U.S. dollar (USD), along with the Japanese yen (JPY) and Swiss franc (CHF) are considered safe-haven currencies.
When there’s a lot of uncertainty in the world. there is usually a “flight to safety” to one or all of these currencies.
These currencies are regarded to be safer because of the size of their large capital markets and liquidity.