Amid escalating concerns over an expanding conflict in the Middle East, currency markets are shifting towards a defensive stance, with investors seeking refuge in both spot and options markets.
In a significant move, the US dollar strengthened against all but two of the Group-of-10 currencies, the Swiss franc and the Japanese yen, following reports of Israel's counterattack on Iran. This event propelled the Bloomberg Dollar Spot Index to its seventh increase in eight days.
The surge in safety-seeking behavior is evident in the options market as well. Risk reversals—a measure indicating market bias and sentiment—highlight an unprecedented bullishness on the Swiss franc against the euro since the end of last year. Similarly, there's a noticeable uptick in the demand for options betting on the yen's appreciation against the dollar, reaching its peak since July.
This retaliation by Israel, confirmed by two US officials, occurs shortly after Iran's aggressive missile and drone attack. Iranian media has seemingly minimized the significance of these developments in their subsequent coverage.
These geopolitical tensions have also stirred the currencies linked to oil prices, with crude oil briefly surpassing $90 a barrel. The aftermath saw a significant rise in the cost to hedge against fluctuations in the Canadian dollar, marking its most considerable increase in over a year, and the Norwegian krone's volatility is on track for its second largest surge in 2023.
Moreover, the demand for the US dollar remains robust, with one-month risk reversals for the Bloomberg Dollar Spot Index nearing a year-high, indicating a strong inclination towards safer assets.
