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What is sovereign risk in forex trading?

Sovereign risk arises when a country defaults on debt, imposes capital controls, or faces political instability. For example, Argentina’s repeated debt crises caused massive peso devaluations. Sovereign risk often hits emerging market currencies hardest, leading to sudden collapses. Traders measure it via bond spreads, credit default swaps (CDS), and political analysis. Hedging sovereign risk involves diversifying across regions and avoiding overexposure to high-risk currencies. Sovereign risk shows that forex trading is not just technical—it is deeply tied to national stability.