During Monday’s early Asian session, the AUD/USD pair fell to around 0.7055. The US dollar (USD) is strengthening against the Australian dollar (AUD) amid escalating tensions in the Middle East after the United States (US) and Israel launched a “massive” and sustained attack on Iran’s leadership and military.
The United States and Israel are engaged in major combat operations against Iran in the wake of a massive joint military attack launched on Saturday. Iranian state television confirmed that Iran’s Supreme Leader Ayatollah Ali Khamenei was killed in Tehran on Saturday. Iran responded with missile and drone attacks on Israel and regional U.S. military bases in Kuwait, Bahrain, Qatar and Jordan. This raises fears of a broader conflict in the Middle East, which underpins safe-haven currencies such as the dollar and weighs on the pair.
Traders will be closely monitoring developments surrounding U.S.-Iran tensions. However, some analysts have warned that the turmoil in US policy under the current administration could impact the US dollar against the Australian currency.
Frequently asked questions on risk sentiment
In the world of financial jargon, two commonly used terms, “risk enhancement” and “risk mitigation,” refer to the level of risk that investors are willing to endure over a given period of time. In a “risky” market, investors are bullish about the future and are more willing to purchase risky assets. In a “risk-free” market, investors begin to “play it safe” because they are concerned about the future, and therefore buy less risky assets that are more likely to produce a return, even if it is relatively modest.
Typically, during periods of increased risk, equity markets rise, and most commodities – except gold – also raise in value as they benefit from positive growth prospects. The currencies of ponderous goods exporting countries are strengthening due to increased demand, and cryptocurrencies are rising. In a risk-free market, bonds rise – 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), Canadian dollar (CAD), New Zealand dollar (NZD) and smaller currencies such as the ruble (RUB) and South African rand (ZAR) tend to rise in risk-off markets. This is because the economies of these currencies rely heavily on commodity exports for their growth, and commodity prices tend to rise during risky periods. This is because investors anticipate greater demand for raw materials in the future due to increased economic activity.
The main currencies that tend to rise during “risk-free” periods are the US dollar (USD), Japanese yen (JPY), and Swiss franc (CHF). The US dollar because it is the world’s reserve currency and also because in times of crisis, investors buy US government debt, which is seen as unthreatening because the world’s largest economy is unlikely to collapse. Yen, from increased demand for Japanese government bonds because much of them are held by domestic investors who are unlikely to abandon them – even in times of crisis. Swiss franc because strict Swiss banking regulations provide investors with better capital protection.
