Global currencies whipsawed on Wednesday as initial fears Iran's attack on US forces in Iraq could lead to more violence in the Middle East gave way to a perception that a wider regional conflict was unlikely.
The Japanese yen jumped to three-month highs against the dollar after the attack before retreating, with the absence of immediate reports of casualties also steadying nerves. The Swiss franc also gave up early gains, as did gold to a lesser extent.
Iran said it had fired missiles at US targets in Iraq on Wednesday in retaliation for last week's US drone strike that killed Iranian commander Qassem Soleimani, stoking fears of a new war in the Middle East.
However, Twitter posts from both sides playing down the prospect of further escalation helped calm currency markets.
US President Donald Trump tweeted that a damage assessment was "So far, so good!" and said "all is well", promising a further statement later on Wednesday. Iranian Foreign Minister Mohammad Javad Zarif tweeted that the attack was "proportionate" and that "we do not seek escalation or war".
"News that Iran had launched ballistic missiles at two bases that house US troops in Iraq sparked an immediate sell-off in risk," said Adam Cole, chief currency strategist at RBC Capital Markets, referring to a fall in the dollar versus the yen and a spike in crude oil prices.
"However, a growing sense that this will be the full extent of Iranian retaliation has seen both moves fully reverse and G10 currencies are back to close to where they closed yesterday."
The yen, regarded as a safe haven in times of geopolitical turmoil by virtue of Japan's status as the world's biggest creditor, dipped 0.2% to 108.68 per dollar. That followed a spike of 0.8% to a three-month high of 107.65 yen per dollar.
Switzerland's currency was 0.2% lower at 0.9724 francs per dollar, having briefly jumped about 0.4% to one-week highs.
The franc was steady against the euro and as trade in Europe wore on, the dollar firmed against other major currencies.
The euro was down a quarter of a percent at $1.1130 , hovering near session lows.
"The market has a belief, rightly or wrongly, that we're not going to see a massive escalation in military activity on a lasting basis," said Kit Juckes, head of currency strategy at Societe Generale in London.
Traders said the focus would now turn to what response, if any, the United States is planning.
The greenback was buoyed on Tuesday by a strong showing in a non-manufacturing business survey, released ahead of Friday's key US jobs report.
Elsewhere, China's yuan, held on to most of Tuesday's steep gains at 6.94 per dollar, after a bumpy ride.
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