Forex · Intermediate · 4 min

Risk-on, risk-off and safe havens

You can explain how investors' risk appetite moves currencies, which currencies tend to act as safe havens, and why that pattern can break.

Panic, and the yen rises

Stock markets crash around the world. One might expect every currency of a major economy to fall with them. Instead, the Japanese yen jumps.

Behind this lies one of the strongest forces in currency markets: the collective mood of investors. This lesson explains how risk appetite moves currencies, which ones tend to act as safe havens, and why that pattern is a habit rather than a law.

Confidence vs. fear

Traders often describe markets as risk-on risk-off:

Risk-on: investors feel confident and seek higher returns. Money flows into stocks, emerging markets and higher-yielding currencies, often funded by borrowing in low-yielding ones.
Risk-off: stress hits. Investors cut risky positions, repay borrowed money and look for safety. Currencies seen as safe havens tend to rise.

The US dollar, the Japanese yen and the Swiss franc have often acted as safe havens. The reasons differ:

the dollar is the world's main currency for trade, funding and reserves, so demand for it rises in stress,
the yen and the franc come from countries with large foreign assets, and they are often used to fund carry trades, so unwinding those trades means buying them back.

The BIS documented such an episode in August 2024. On 5 August, Japan's TOPIX index fell 12% in a single day. The BIS links the turbulence to a deleveraging and an unwinding of carry trades, especially those funded in yen. It described a chain reaction set off by a relatively minor event, after which markets stabilized quickly.

Safe-haven behavior is a tendency drawn from past episodes. A crisis that starts in the safe-haven country itself, or a change in its central bank's policy, can turn the pattern around.

5 Aug 2024: TOPIX −12%

Building on the BIS description, a simplified chain:

For months, investors borrowed yen cheaply and invested in higher-yielding assets.
In July 2024, the yen's long decline reversed. Positions funded in yen began to lose money.
Margin calls and rising volatility forced many to close positions at once. Closing meant buying yen back.

The yen rose sharply, risky assets fell, and Japan's stock market had one of its worst days. A few days later, markets had calmed again. Traders who expected calm to continue had been caught by a mood shift that unfolded within days.

Common mistakes

Treating safe havens as rules. They are habits that can break.
Ignoring crowded positions. Popular trades can unwind violently.
Forgetting correlations. In risk-off, many trades lose at once.
Assuming stress lasts. Some episodes reverse within days.

The takeaway

When investors feel confident, money flows to riskier, higher-yielding currencies. In stress, it often flows back to the dollar, the yen and the franc.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the mood in which safe-haven currencies tend to rise.

Tap the chart.

In stress, investors reduce risky positions and buy currencies seen as safe.
2Why does the yen often rise in a market panic?

The BIS described exactly this in August 2024, when yen-funded carry trades were unwound.
3What happened on 5 August 2024, according to the BIS?

The BIS described the turbulence as a chain reaction set off by a relatively minor event, followed by quick stabilization.
4Is a safe-haven currency safe in every crisis?

Safe-haven behavior is a tendency based on past episodes, not a rule.

of 4 correct.