The US Dollar (USD) remains the worst-performing G8 currency this week. The Dollar Index, which measures the value of the USD against a basket of six peers, trades right above 98.00 at the time of writing, its weakest level since the war in the Middle East started on February 28.
Market hopes that the peace talks between the US and Iran will resume soon have boosted risk appetite this week, prompting investors to cut down US Dollar long positions. The USD Index has lost nearly 1% this week so far, and is more than 2% lower since the ceasefire was announced last week.
US President Donald Trump added pressure on the safe-haven dollar on Tuesday, suggesting in an interview with the New York Post that negotiations with Iran might resume soon. Iranian authorities did not make any comment, but the United Nations Secretary-General Antonio Guterres affirmed that peace talks are likely to restart this week.
In the macroeconomic front, the US Producer Prices Index (PPI) data from March, released on Tuesday, confirmed that the war in Iran has boosted inflationary pressures, although the PPI rose below expectations in March, easing pressure on the US Federal Reserve (Fed) to raise interest rates immediately.
Inflation at factory gates rose to a 4% year-on-year rate last month, from 3.4% in February, but remained below the 4.6% market consensus. Excluding food and energy, the core PPI rose at a steady 3.8% yearly rate, unchanged from February, against expectations of a 4.2% increment.
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.