The US dollar continued to rally off of monthly lows into the start of the forex trading week, but news of a confrontation between US and Iranian forces in the Strait of Hormuz forced a pronounced greenback selloff through early-morning trade. Traders initially feared the worst and sold the American currency in a knee-jerk reaction to early reports, but later clarification put the incident into the context of prior Iranian-US confrontations in the geopolitical hotspot. The lack of economic data meant that such risk aversion-linked currency flows forced the majority of price volatility, but an overnight carry trade unwind favored US dollar strength. The net result left the US dollar notably higher through the past 24 hours of trading, but markets subsequently await a key string of Fed speeches and housing/credit data to guide the greenback in the week ahead.
Tokyo and London session traders sent the dollar significantly higher heading into the US open, as sharp drops in the Japanese Nikkei 225 index forced a general unwind of Japanese Yen and greenback short positions. Relatively unchanged UK FTSE 100 and German DAX indices eased broader carry trade selling pressures, but it remains clear that momentum remains to the downside for global risky asset classes. Indeed, the Japanese Yen has been the strongest performer among all major world currencies on the past week of equity market sell-offs. Unless such stock market bearishness subsides, we may continue to see much of the same price action into the week ahead.
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Written by David Rodríguez, Currency Analyst for DailyFX.com, [email protected]
