Risk Aversion Grips Markets Amid Escalating Middle East Tensions
Markets turned risk-averse on Wednesday as tensions in the Middle East escalated further. The crisis deepened after Iran claimed that US military strikes killed civilians, prompting a response from the Islamic Revolutionary Guard Corps attacking two US military bases in the UAE. As a result, crude oil prices surged nearly 5% on Tuesday and reached its highest level since late July at $90 per barrel.
US President Donald Trump warned that if Tehran retaliates, it will be hit 'at a much harder and higher level,' but analysts at Danske Bank note that this has intensified concerns over Middle East supply risks. Brent crude extended gains to trade above $95 per barrel, its highest in nearly six weeks.
The US Dollar Index (DXY) also benefited from the risk-averse market atmosphere, closing in positive territory on Tuesday and continuing to push higher toward 100.00 early Wednesday. The Reserve Bank of New Zealand (RBNZ) raised its policy rate by 25 basis points to 2.75% as expected, but this had little impact on the NZD/USD exchange rate.
The data from Australia showed that its GDP expanded at an annual rate of 2.1% in the second quarter, beating analysts' estimates. However, AUD/USD remained flat on the day despite this positive news. The Canadian Dollar (CAD) was pressured by Canada-US tensions and expectations for a dovish Bank of Canada (BoC) monetary policy decision.