Yen and Gold Sag as US-Iran Worries Ebb, But for How Long?

*Yen and, gold prices soar, then reverse, as Iran attacks US bases in Iraq
*Markets may cheer de-escalating Tehran, Washington rhetoric too readily
*Acute geopolitical instability fears may yet drive broad risk-off dynamics

Financial markets were struck with explosive volatility after an Iranian strike against US military targets in Iraq. Futures tracking the bellwether S&P 500 index plunged alongside the sentiment-linked Australian and New Zealand Dollars while the anti-risk Japanese Yen rose with gold prices and Treasury bonds.
An about-face reversal was not far behind however as Iranian Foreign Minister Javad Zarif said the strike marked the conclusion of its “proportionate” response to a US airstrike killing Qassim Soleimani – the head of the Revolutionary Guard Corps’ elite Quds Force wing – earlier in the week.
A chipper tweet from US President Donald Trump claiming of the situation that “all is well” helped reinforce the sense that immediate escalation has been halted. Shell-shocked investors appeared ready embrace these pronouncements, unwinding the lion’s share of the risk-off sweep across the major asset spectrum.

Such optimism may be premature. Mr Soleimani is understood to have been the point-man for directing Iranian patronage of a variety of nonstate combat groups, including widely known terrorist groups like Hamas and Hezbollah. It seems fanciful to assert that a response from them is necessarily ruled out.
Indeed, while the Washington and Tehran have largely avoided open and direct military conflict over the decades of animosity since the 1979 Iranian Revolution, a covert war fought with spies and proxies has raged on. The Islamic Republic has shown time and again it is willing to challenge the US in this way.
This much is probably not lost on most investors, the markets’ usual pro-risk bias notwithstanding. That speaks to hair-trigger sensitivity to headline risk, meaning another sudden burst of liquidation could be activated at a moment’s notice. Worries about such a scenario may encourage a risk-off tone by themselves.

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