Australian Dollar slumps to near 0.7050 amid escalating Middle East tensions
- AUD/USD falls to near 0.7055 in Monday’s early Asian session.
- Traders turn to the safe-haven currency amid the Iran crisis.
- The conflicts in the Middle East will be closely watched.
The AUD/USD pair tumbles to around 0.7055 during the early Asian session on Monday. The US Dollar (USD) strengthens against the Australian Dollar (AUD) amid escalating tensions in the Middle East after the United States (US) and Israel launched a "massive" and ongoing attack against Iran's leadership and military.
The US and Israel are engaged in major combat operations against Iran, following a massive joint military strike launched on Saturday. Iranian state television confirmed that Iran's Supreme Leader Ayatollah Ali Khamenei was killed in an airstrike in Tehran on Saturday. Iran responded with missile and drone attacks targeting Israel and regional US military bases in Kuwait, Bahrain, Qatar, and Jordan. This raises fears of wider conflict in the Middle East, which underpins the safe-haven currencies such as the Greenback and acts as a headwind for the pair.
Traders will closely monitor the developments surrounding the US-Iran tensions. However, some analysts warn that US policy turbulence under the current administration could weigh on the USD against the Aussie.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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