Safe-Haven Currencies: Risk-On and Risk-Off Explained

What is a safe-haven currency?

A safe-haven currency is one that investors tend to buy when they are frightened, so it usually holds its value or rises while share markets and riskier currencies fall. The three best known are the Japanese yen, the Swiss franc and the US dollar. Gold plays a similar role, although it is a metal and not a currency.

What do risk-on and risk-off mean?

Traders use these two phrases to describe the market’s mood, also called risk sentiment.

• Risk-on: investors feel confident and chase return. Money flows into shares, commodities (raw materials such as oil and metals) and currencies that pay higher interest.
• Risk-off: investors are worried and want to protect their money. They sell whatever could fall fast and buy what feels safe: government bonds, the yen, the franc, the dollar and gold.

A banking scare, a war or a shock piece of economic data can flip the mood within a day, and the change moves many markets at once. If you watch only one chart, a move that started elsewhere can catch you out.

What makes a currency a safe haven?

Nobody appoints a safe haven. A currency earns the role through a mix of features.

• Deep, liquid markets: liquidity means you can buy or sell a large amount quickly without moving the price much. Big investors need a market that can absorb billions in a panic.
• A country that lends to the world: a nation with a current-account surplus earns more from abroad than it spends there. Over the years it builds up savings overseas, known as net foreign assets. In a crisis some of that money comes home, which means buying the home currency.
• Political and legal stability: investors trust that the rules will not change overnight and that they can always get their money out.
• Low interest rates: traders borrow low-rate currencies to buy currencies that pay more interest, a strategy called the carry trade. When fear hits they close those trades, and closing means buying back the borrowed currency. Our guide to the carry trade and interest rates explains the mechanics.

Is the yen a safe haven?

Yes. Historically the yen has been one of the most reliable havens. Japan is one of the world’s largest creditor nations, with huge holdings of foreign assets. Japanese interest rates were also among the world’s lowest for decades, which made the yen the favourite currency to borrow for carry trades. When markets panic, those trades are unwound and the yen is bought back. In the 2008 financial crisis the yen rose sharply against almost every other currency.

So USD/JPY and the other yen pairs tend to fall on fearful days. The yen’s weak point is the interest-rate gap: when rates abroad are far higher than in Japan, that pull can outweigh fear for long periods.

The Swiss franc, the US dollar and gold

The Swiss franc rests on Switzerland’s long political neutrality, stable laws, low inflation and steady current-account surplus. It tends to gain most when the trouble is in Europe, because it is the nearest shelter for euro-area money. Watch EUR/CHF as well as USD/CHF.

The US dollar is the world’s main reserve currency, the one central banks hold most, and much of the world’s trade and debt is in dollars. In a real crisis, companies and banks everywhere scramble for dollars, and investors buy US government bonds. The dollar rose strongly in the 2008 crisis and again in March 2020.

The dollar also rises in good times, when the US economy outgrows others and US interest rates are high. Currency strategist Stephen Jen named this pattern the “dollar smile”: strong at one end (global fear), strong at the other (a US boom) and weaker in the middle, when the world is calm and money goes abroad for better returns. Follow the broad dollar with the US Dollar Index.

Gold is the haven that is not a currency. It is nobody’s debt and no central bank can print it, so investors turn to it when they doubt paper money itself. It trades as XAU/USD. Its weak spots: it pays no interest, so it struggles when interest rates are high, and in a severe dash for cash it can be sold with everything else. Our gold trading guide covers its drivers.

Which currencies are risk currencies?

These currencies tend to rise in a risk-on mood and fall in a risk-off one.

• Australian dollar (AUD) and New Zealand dollar (NZD): both economies depend on exporting commodities such as iron ore, coal and dairy products, and on demand from China. When world growth looks shaky, those exports look less valuable. Both have also often paid more interest than the havens, so they attract carry trades.
• Canadian dollar (CAD): tied to the oil price and to the health of the US economy. It usually reacts less violently than AUD or NZD.
• Emerging-market currencies: developing economies often pay high interest, but their markets are thinner and their politics less settled, so foreign money leaves quickly when fear rises.

The euro and the pound sit in between, although the pound often leans to the risk side.

How to tell if the market is risk-on or risk-off

• Share indices: when the main indices in Asia, Europe and the US all fall hard on the same day, the mood is risk-off.
• The VIX: an index that shows how much movement traders expect in US shares over the next 30 days, often called the “fear gauge”. Roughly, readings in the teens are calm and readings above 30 signal real stress.
• Government bond yields: a yield is the interest return on a bond. When investors rush into safe government bonds, bond prices rise and yields fall. Falling US yields together with falling shares is a classic risk-off sign.
• AUD/JPY: a risk currency against a haven in one chart. A rising AUD/JPY says confidence; a sharp fall says fear.

A currency strength meter gives the same picture: JPY, CHF and USD at the top with AUD and NZD at the bottom means risk-off.

What does a risk-off day look like across pairs?

• Yen pairs fall, and those with a risk currency in them, such as AUD/JPY and NZD/JPY, fall the most. USD/JPY usually falls less, because the dollar is a haven too.
• AUD/USD and NZD/USD fall, and USD/CAD rises.
• EUR/CHF falls. USD/CHF is harder to call, because both sides are havens.
• Gold often rises, but not every time.
• Pairs that normally move separately start moving together, which our guide to currency correlation explains.

Fear also moves faster than confidence: risk-off falls are usually sharper than the climbs before them.

Why safe havens are not guaranteed

• Central banks push back: a rising currency hurts a country’s exporters. The Swiss National Bank held the franc down with a cap against the euro from 2011 until January 2015. When it dropped the cap without warning, the franc leapt within minutes and wiped out many trading accounts. Japan’s authorities have also intervened at times.
• Interest rates can win: in 2022 share markets fell for much of the year, yet the yen weakened sharply, because US rates were rising fast while Japan’s stayed near zero.
• The crisis may be the haven’s own: if the fear is about the US itself, such as its government debt or its banks, the dollar can fall while the franc, the yen and gold rise.

How to use risk sentiment in your trading

• Check the mood first: buying AUD/JPY while shares are sliding means fighting the tide.
• Count one bet as one bet: buying AUD/JPY, buying NZD/USD and selling USD/CAD are all the same risk-on bet. Size them as one position.
• Pick the clearest pair: a risk currency against a haven expresses a view on fear more cleanly than EUR/USD does.
• Plan for gaps: in a panic, spreads (the gap between buy and sell prices) widen and prices jump past stop-loss orders. When you compare regulated brokers, look for negative balance protection, a rule that stops your account going below zero.

Risk sentiment describes how markets usually behave, not how they must behave. A haven can fall on a fearful day, and no gauge tells you how long a mood will last. Forex and CFDs carry a high risk of loss, and fast risk-off moves can produce losses larger than planned. Only risk money you can afford to lose.