Risk Aversion is when investors move their cash out of high risk assets and place it in assets that are seen as “safe havens”.
Risk Aversion isn’t a dogmatic term because “high risk” can be defined differently by individuals but, it is an interesting topic to research.
The Dollar is known as a safe haven currency. When the U.S. Dollar is looking ugly, people may be more prone to buy U.S. treasuries because of their reputation. When this happens, the U.S. economy and U.S. dollar can benefit.
Risk Aversion could be applied to more life situations than just the Forex market. It’s a term used to describe people’s preference of certainty over uncertainty.
A great example of risk aversion can be found in the financial crisis in 2008. The Dollar rose greatly against most major currencies in spite of U.S. economic horrors. Of course it wasn’t just the Dollar that experienced the financial crisis but, the point is, everyone ran to the safe haven, “the U.S. Dollar”. That, my friend, is risk aversion.
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