Key Moments
- AUD/USD erased sharp early-session losses and traded near 0.7000 after a pause in planned U.S. military action against Iran.
- S&P 500 futures recovered from early weakness and were up more than 2% following the announcement.
- The US Dollar Index (DXY) reversed earlier gains and was down 0.2% around 99.30 as risk appetite improved.
Market Reaction to Trump’s Pause on Iran Strikes
The AUD/USD pair experienced sharp intraday swings during the European session on Monday after U.S. President Donald Trump said he had directed the Department of War to suspend planned military strikes on Iranian power plants for five days.
Following the announcement, risk sentiment improved markedly. AUD/USD, which had suffered notable losses earlier in the session, rebounded and was trading close to unchanged around the 0.7000 level at the time of writing. U.S. equity risk appetite also firmed, with S&P 500 futures recapturing earlier declines and moving to gains of more than 2%.
Dollar Performance Against Major Currencies
The U.S. Dollar’s performance against major counterparts shifted after the change in geopolitical tone. According to the latest readings, the Dollar was weakest versus the Japanese Yen.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.09% | -0.30% | -0.36% | -0.02% | 0.16% | 0.09% | 0.02% | |
| EUR | 0.09% | -0.22% | -0.26% | 0.06% | 0.36% | 0.16% | 0.09% | |
| GBP | 0.30% | 0.22% | -0.08% | 0.27% | 0.57% | 0.37% | 0.29% | |
| JPY | 0.36% | 0.26% | 0.08% | 0.35% | 0.52% | 0.37% | 0.36% | |
| CAD | 0.02% | -0.06% | -0.27% | -0.35% | 0.16% | -0.03% | -0.02% | |
| AUD | -0.16% | -0.36% | -0.57% | -0.52% | -0.16% | -0.19% | -0.16% | |
| NZD | -0.09% | -0.16% | -0.37% | -0.37% | 0.03% | 0.19% | -0.05% | |
| CHF | -0.02% | -0.09% | -0.29% | -0.36% | 0.02% | 0.16% | 0.05% |
The heat map above shows percentage moves among major currencies. The currency in the left-hand column serves as the base, and the currency at the top of each column is the quote. For example, selecting the U.S. Dollar as the base on the left and moving across to the Japanese Yen column gives the percentage change for USD/JPY.
DXY Reverses Higher Move as Risk Appetite Improves
The immediate reaction in the broader Dollar complex also shifted after the announcement. The U.S. Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, surrendered earlier gains and slipped 0.2%, trading near 99.30.
Background: Earlier Threats and Iran’s Response
Before the order to pause strikes, risk sentiment had been weak. Earlier in the day, markets were in a risk-averse stance after U.S. President Trump posted on Truth.Social that he would obliterate Iran’s power plants if Tehran failed to open the Strait of Hormuz within 48 hours.
In reply, Iran pledged to respond with an indefinite closure of the Strait of Hormuz and attacks on regional infrastructure belonging to the U.S. and Israel should Tehran’s infrastructure come under attack.
Understanding Risk Sentiment
The article also explains commonly used terminology around risk appetite in financial markets.
“Risk-on” vs. “Risk-off”
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.
Assets to Watch for Shifts in Risk Appetite
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.
Currencies Favored in “Risk-on” Environments
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.
Currencies Favored in “Risk-off” Environments
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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