US Dollar Index (DXY) picks up above 98.00 as geopolitical tensions grow
- The US Dollar Index appreciates beyond 98.00 but remains within previous ranges.
- Trump's vow to free Hormuz vessels has sparked fresh tensions with Tehran.
- US employment data due later this week will put into context the Fed's hawkish tilt.
The US Dollar (USD) edges up against its main peers on Monday, with the USD Index (DXY) returning to levels above 98.00 after bouncing at 97.70 lows on Friday, although it remains within the lower range of the last few weeks' trading band. Escalating verbal tensions between the US and Iran have dampened investors’ appetite for risk and are underpinnig a mild USD recovery.
The situation in the Middle East soured after US President Donald Trump announced a plan to free vessels stranded in Iran that will start on Monday. Trump has not given any further details on a complex operation, but Tehran has warned that any incursion on Iran’s waters by the US military will be considered a violation of the ceasefire and responded with “full strength.”
Trump’s plans have sent Oil prices higher. The US benchmark West Texas Intermediate (WTI) is trading a few cents below the $100 level, curbing investors' appetite for risk and weighing on some of the US Dollar's main rivals like the Euro (EUR) and the Japanese Yen (JPY).
In the economic calendar, the focus today is on the US Factory Orders for March, although the highlights of the week will be April’s job reports, especially Friday’s Nonfarm Payrolls data. These figures will be observed with interest following the hawkish tilt of last week’s Federal Reserve (Fed) monetary policy meeting, where three dissenters opposed including the “easing bias” in the statement.
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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