Geopolitical risk returned with a vengeance this week, lifting traditional haven currencies and overshadowing other factors such as diverging interest rates and economic data.
The geopolitical hot spots are Italy, where euroskeptic parties are weighing on the euro, and North Korea, which is threatening to pull out of the U.S.-led talks that are scheduled next month in Singapore.
That was positive news for haven currencies. Beneficiaries largely benefited from a flight to safety, with perceived haven assets seen offering greater security in turbulent times in part thanks to their inherent liquidity. Classic haven currencies are the Japanese yen
USDJPY, -0.04%
and the Swiss franc
USDCHF, +0.0100%
but the U.S. dollar also functions as a haven at times.
Read: Why it may be downhill from here for the U.S. dollar
Despite Japans geographical closeness to the Korean Peninsula, for example, the yen has been the go-to haven to deflect regional geopolitical risk for investors. The reason for that is the tremendous liquidity in the yen market, spurred in part by Japanese financial players divesting and bringing cash back home in times of trouble or volatility.
The overnight news that North Korea has pulled out of high level talks with South Korea due to a joint military exercise between South Korea and the U.S. is yen-supportive, said Jane Foley, senior FX strategist at Rabobank.
The dollar last fetched 楼110.23, off the four-months high it reached Tuesday.
But while the dollar
DXY, +0.10%
weakened against the yen, it strengthened against the euro
EURUSD, +0.0085%
The euro last bought $1.1805, down from $1.1837 late Monday. On the month, the euro has fallen 2.3%, according to FactSet.
Check out: The euro could rally to $1.30 within 12 months, says currency strategist
The culprit at least in part is Italy, where the populist 5 Star Movement and right-wing League are working towards a coalition government following the countrys March election. While both parties were considered euroskeptic during their campaigns, markets since discounted the risks of them moving against the European Union.
See: Italian markets spooked as radical agenda from 5 Star, League fuels fears of new crisis
But Wednesday, a document obtained by the Huffington Post showed that if teamed up they could push for up to 250 billion in debt forgiveness from the European Central Bank, as well as push to create a mechanism that would make it easier to leave the euro, and renegotiate Italys contributions to the EU budget. Italy also wants to end economic sanctions against Russia, according to the document, and markets got spooked, leading the euro to sell off out of fear over further disintegration in the eurozone.
Read: Italian bonds show euro exit fears still rumble below the surface
The parties attempted to play down some of the details of the document, calling it an old draft, but the damage to market confidence and the single currency was already done, said Omer Esiner chief market analyst at Commonwealth FX.
The euro didnt just fall against the dollar, but also against the other havens, the yen
EURJPY, -0.02%
and the franc
EURCHF, +0.0169%
With Brexit negotiations still ongoing and euroskeptic voices getting louder across the currency bloc, an anti-E.U. leaning government in Italy could be a drag on European sentiment.
The worlds most heavily-traded pair has now broken its previous support around $1.1820/50, a range which is now going to be the first key resistance zone to watch, wrote Fawad Razaqzada, market analyst at Forex.com. If the weakness persists, the euro could drop to test the $1.17 handle next.
How long geopolitical risk will be the driver of currencies this time around is uncertain. But if the past 12 months have taught us anything, it is that market reactions tend to get shorter-lived the more market moving headlines every new day brings.
Also check out: Turkish lira hits historic low as Erdogan eyes control of countrys central bank
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Quote References USDJPY -0.04 -0.04% USDCHF +0.0001 +0.0100% DXY +0.09 +0.10% EURUSD +0.0001 +0.0085% EURJPY -0.02 -0.02% EURCHF +0.0002 +0.0169% Show all references
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