On Wednesday, August 28, the US Dollar (USD) Index rebounded toward 101.00 after touching its weakest level in over a year near 100.50. With no high-tier data releases on the economic calendar midweek, investors will be closely monitoring central bank official comments and geopolitical headlines. The table below shows the percentage change of the USD against major currencies this week, with the USD being the strongest against the Euro.
The modest improvement in risk sentiment made it challenging for the USD to remain resilient against major rivals on Tuesday. Despite this, US stock index futures were virtually unchanged early Wednesday, and the 10-year US Treasury bond yield fluctuated slightly above 3.8%. In Australia, the Consumer Price Index rose 3.5% on a yearly basis in July, slightly below market expectations. The initial reaction pushed AUD/USD to a fresh 2024-high above 0.6810, but it later retreated below 0.6800.
Bank of Japan (BoJ) Deputy Governor Ryozo Himino mentioned on Wednesday that financial and capital markets remain unstable. He emphasized the need for vigilance on these developments without significantly impacting USD/JPY’s action, which was trading near 144.50. EUR/USD edged higher on Tuesday but lost momentum near 1.1200, while GBP/USD extended its rally to reach its highest level since March 2022 above 1.3260. Gold also registered modest gains before retreating below $2,510 on Wednesday.
In the financial world, “risk-on” and “risk off” refer to investors’ willingness to take risks. During a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets, leading to stock market gains and commodities rising in value. Currencies of heavy commodity exporters strengthen during this period. In a “risk-off” market, investors play safe, leading to bonds, Gold, and safe-haven currencies like the USD, JPY, and CHF benefiting.
During periods of “risk-on”, currencies like the AUD, CAD, NZD, as well as minor FX like the RUB and ZAR, tend to rise due to their economies’ reliance on commodity exports. In contrast, major currencies like the USD, JPY, and CHF rise during “risk-off” periods. The USD benefits from being the world’s reserve currency, while the JPY and CHF benefit from increased demand for government bonds and strict banking laws, respectively. Investors should carefully monitor these risk sentiment indicators to make informed decisions.
