FOREIGN EXCHANGE RISK AVERSION

In  trading, the market tends to be "moody", meaning it follows the moods of it's participants.

These moods come in two ways, risk taking, and risk aversion.

Risk taking is when investors are not worried about any upcoming issues in the market. They generally feel that there are no surprises coming.

Risk aversion is a kind of trading behavior exhibited by the foreign exchange market when a potentially adverse event happens which may affect market conditions. This behavior is caused when risk averse traders liquidate their positions in risky assets and shift the funds to less risky assets due to uncertainty

In the context of the foreign exchange market, traders liquidate their positions in various currencies to take up positions in safe-haven currencies, such as the US Dollar.

During the financial crisis of 2008, the forex market overreacted with massive risk aversion. The people tought: t”he market is collapsing. Are my money in danger? I better shift my funds out when i can and park them in safe assets in the meanwhile” . Investors pulled their money out of anything that paid interest and focused on "safe haven" type currencies. This caused a crash on the Australian Dollar and a surge in the US Dollar.

Ironically, the center of the triggers for the financial crisis were based on the United States, but because the US Dollar is viewed as a safe haven during unpredictable times money flowed into it day after day. Sometimes, the choice of a safe haven currency is more of a choice based on prevailing sentiments rather than one of economic statistics.