Kiwi Holds Near 0.5800, as Tensions Boost Dollar Demand

Key Moments

NZD/USD Edges Lower on Heightened Geopolitical Risk

The NZD/USD pair is trading with a cautious tone near 0.5800 during the Asian session on Thursday, with the New Zealand Dollar under pressure as geopolitical developments unsettle market sentiment. The move follows Iran’s rejection of a ceasefire proposal and a 15-point settlement plan put forward by United States President Donald Trump, dampening expectations for a de-escalation of conflicts in the Middle East.

On Wednesday, Iran’s Fars news agency reported that Tehran does not consider a truce and talks to be viable under current conditions. According to the Wall Street Journal (WSJ), Iran has insisted that its principal demands be met before it engages in direct negotiations with Washington. These conditions include the closure of all US bases in the Gulf, reparations for attacks, the lifting of all sanctions, permission to maintain its missile program without restrictions, and recognition of Iran’s authority over the Strait of Hormuz.

Safe-Haven Flows Support the US Dollar

The renewed uncertainty surrounding the trajectory of the conflict in the Middle East has reinforced demand for traditional safe-haven assets, notably the US Dollar (USD). As of writing, the US Dollar Index (DXY) – which measures the Greenback against a basket of six major currencies – is holding near Wednesday’s gains around 99.65.

Alongside the geopolitical backdrop, firm expectations that the Federal Reserve will refrain from adopting a dovish policy shift this year are also helping keep the USD supported. The combination of elevated geopolitical risk and a steady Fed outlook is limiting upside potential for risk-sensitive currencies such as the New Zealand Dollar.

RBNZ Keeps Options Open Amid Inflation Concerns

In New Zealand, monetary policy guidance remains balanced, with the central bank warning about elevated inflation while signaling that future adjustments could go in either direction. Reserve Bank of New Zealand Governor Anna Breman emphasized caution in responding to price pressures.

“We don’t want to react too soon to inflationary pressures that we can do little about, but we don’t want to wait too long in case we see those inflationary pressures becoming more-long lasting,” Reserve Bank of New Zealand Governor Anna Breman said earlier this week, Reuters reports, and added, “I will not rule out either rate hikes or rate cuts because of the uncertainty in the global environment.”

Understanding Risk Sentiment Dynamics

In financial markets, the terms “risk-on” and “risk-off” describe investors’ appetite for risk over a given period. In a “risk-on” environment, investors are more optimistic and more inclined to allocate capital to higher-risk assets. In contrast, a “risk-off” setting reflects a more defensive stance, where investors favor safer instruments due to concerns about the outlook.

Key Assets to Watch for Risk Sentiment

During “risk-on” phases, equity markets typically advance, most commodities except Gold tend to appreciate as they benefit from a more favorable growth outlook, and the currencies of major commodity-exporting nations strengthen. Cryptocurrencies also tend to perform well when risk appetite is strong.

When conditions turn “risk-off,” government bonds – particularly those issued by major economies – generally attract buying interest, Gold often performs strongly, and safe-haven currencies such as the Japanese Yen, Swiss Franc, and US Dollar usually benefit.

Currencies That Gain in Risk-On Versus Risk-Off

In a “risk-on” environment, the Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD), and several smaller currencies such as the Ruble (RUB) and South African Rand (ZAR) have a tendency to strengthen. These economies rely heavily on commodity exports, which often rise in price when investors anticipate stronger economic activity and higher demand for raw materials.

In “risk-off” conditions, the US Dollar (USD), Japanese Yen (JPY), and Swiss Franc (CHF) are typically supported. The US Dollar benefits from its status as the world’s reserve currency and from demand for US government debt, which is perceived as secure. The Yen is underpinned by demand for Japanese government bonds, a large portion of which are held domestically and are less likely to be sold in times of stress. The Swiss Franc is supported by strict Swiss banking regulations that provide enhanced capital protection for investors.