Forex Today: USD holds ground as Middle East chaos spreads
Here is what you need to know on Tuesday, March 3:
The US Dollar (USD) continues to gather strength against its rivals following Monday's bullish action, with the USD Index fluctuating at its highest level since late January above 98.80 in the European morning on Tuesday. The European economic calendar will feature preliminary February Harmonized Index of Consumer Prices (HICP) data later in the day. Nevertheless, market participants will remain focused on news surrounding the crisis in the Middle East and pay close attention to comments from central bankers.
US military officials said early Tuesday that they have destroyed command posts of Iran’s Revolutionary Guards as well as Iranian air defense and missile launch sites since the start of the joint Israeli-US offensive on Saturday. "We will continue to take decisive action against imminent threats posed by the Iranian regime,” US Central Command noted. Meanwhile, US President Donald Trump said that he doesn't think "boots on the ground" will be necessary and added that the US' response to the attack on the US embassy in Riyadh will be seen soon.
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the strongest against the Swiss Franc.
USD EUR GBP JPY CAD AUD NZD CHF USD 1.06% 0.63% 0.85% 0.25% -0.35% 0.71% 1.99% EUR -1.06% -0.43% -0.20% -0.81% -1.40% -0.34% 0.92% GBP -0.63% 0.43% 0.04% -0.38% -0.98% 0.08% 1.35% JPY -0.85% 0.20% -0.04% -0.57% -1.16% -0.05% 1.15% CAD -0.25% 0.81% 0.38% 0.57% -0.63% 0.52% 1.74% AUD 0.35% 1.40% 0.98% 1.16% 0.63% 1.07% 2.33% NZD -0.71% 0.34% -0.08% 0.05% -0.52% -1.07% 1.27% CHF -1.99% -0.92% -1.35% -1.15% -1.74% -2.33% -1.27%The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
Meanwhile, citing a commander in Iran’s Revolutionary Guard Corps (IRGC), Reuters reported that the Strait of Hormuz is closed and Iran will attack on any vessel trying to pass. Crude oil prices continue to rise on Tuesday and the barrel of West Texas Intermediate (WTI) was last seen trading near $74, gaining more than 4% on the day.
Reflecting the risk-averse market atmosphere, the US stock index futures are down more than 1% in the European morning on Tuesday.
EUR/USD remains under heavy bearish pressure after posting large losses on Monday and trades near 1.1650, losing more than 0.3% on the day.
Gold stays relatively calm early Tuesday and fluctuates in a tight channel above $5,300.
GBP/USD extends its slide on broad USD strength and loses about 0.5% on the day below 1.3350.
USD/JPY stays in a consolidation phase above 157.00 after gaining more than 0.8% on Monday. According to Reuters, three sources familiar with the central bank’s thinking have stated that it has become difficult for the Bank of Japan to raise rates, arguing that the central bank would need time to scrutinise how its “past rate hikes and the Middle East conflict affect the economy and prices."
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.
What are the key assets to track to understand risk sentiment dynamics?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.
Which currencies strengthen when sentiment is "risk-on"?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.
Which currencies strengthen when sentiment is "risk-off"?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.