Risk Aversion in Forex

Forex risk aversion helped the Swiss franc and Yen rise recently. What is Forex risk aversion? Risk aversion is when traders buy Yen, Swiss francs, or the dollar as a safe haven currency. Traders and investors see other currencies as risky and choose to move assets into currencies of countries that are economically stable. Traders seek currencies that are likely to rise in relation to others, not because of their own strength so much as because of the weakness of other currencies. At the current time the Swiss franc and the Yen are seen as safe haven currencies for those with Forex risk aversion. The US dollar is currently seen as less of a safe haven due to mounting debt problems of the USA. A congressional showdown that temporarily left repayment of US debts in doubt did little to help matters. Although Chinese support of Spanish debt has helped the Euro recently it fell off of the safe haven list some time ago.

There are both long term and short term Forex risk aversion strategies. A long term strategy is to stay away from falling currencies such as the dollar and Euro. A commonly more profitable Forex risk aversion strategy is to move into safe haven currencies in times of stress and out just before ailing currencies recover. The US dollar, fore example, has been declared down and out several times over the years. Those who have doubted the demise of the greenback have often profited by buying dollars as they bottom out. Another profitable way to play a Forex risk aversion strategy is to move into a strong currency like the Swiss franc when a crisis looms. Then the trader can buy calls on dollars, Euros or his currency of choice. When the faltering currency recovers, the trader profits. How to build a trading plan for Forex today can be to simply buy Yen or francs and hold them. A more profitable strategy will be to acknowledge that currencies can vary substantially in value and that anticipation of price movement is where the profit is.

Although Forex risk aversion can drive investors to buy Yen, the recent earthquake and tsunami in Japan occasioned another move. The rush by Japanese to return assets home to deal with the cost of the natural disaster caused a spike in the Yen. Once the necessary funds have been transferred and Yen repatriation has run its course the buying pressure on the Yen will subside. At that time traders will be wise to be watchful of a resultant fall in the Yen. Eventually, when things stabilize in Japan assets will move offshore again causing downward pressure on the Yen. Whenever traders seek a safe haven currency they must assess both the historic state of various currencies but the state today of the Yen, dollar, Euro, pound, or Swiss franc. Although the dollar has traditionally been considered a safe haven currency, its slow and steady fall reduces its attractiveness for holding long term. However, trading the dollar at times of Forex risk aversion can be profitable.