US Dollar Index declines below 99.00 on Trump’s war comments, US CPI data in focus

US Dollar Index drifts lower to around 98.80 in Wednesday’s early European session.
Trump stated the war could end "very soon", but gave no clear timeline for halting attacks.
The US February CPI inflation report will be in the spotlight later on Wednesday.

Lallalit Srijandorn FXStreet

The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 98.80 during the early European trading hours on Wednesday. The DXY declines following US President Donald Trump's signal that the ongoing Middle East conflict could end soon.

Trump said during a press conference on Monday that the war against Iran will end “very soon" and also said that oil prices will drop. Additionally, the US indicated it was considering seizing control of the Strait of Hormuz to ensure the flow of tankers, easing fears of a spike in oil prices. This, in turn, drags the US Dollar lower against its rivals as safe-haven demand fades.

Nonetheless, Trump gave no clear timeline for halting attacks that have rattled the Middle East and global markets, and the Israeli military launched a fresh wave of strikes at Iran and Lebanon. Uncertainty surrounding the Middle East conflicts could underpin the DXY in the near term.

The US President said that the war would be over when Iran no longer had the capacity to use weapons against Washington, Israel, and other allies for a long time. Meanwhile, the Islamic Revolutionary Guard Corps (IRGC) escalated its operations against the US and Israel. The IRGC announced the start of targeting the enemy's technological infrastructure in the region.

Traders brace for the US February Consumer Price Index (CPI) inflation report later on Wednesday for more clues about the US interest rate path. The headline CPI is projected to show an increase of 2.4% year-over-year in February. The core CPI, which excludes the often-volatile food and energy categories, is expected to show a rise of 2.5% during the same period. If the reports show softer-than-expected outcomes, this could weigh on the Greenback.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

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.

What are the key assets to track to understand risk sentiment dynamics?

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.

Which currencies strengthen when sentiment is "risk-on"?

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.

Which currencies strengthen when sentiment is "risk-off"?

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.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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