Yen drops to two-week low vs dollar as US-Iran tension fades

A woman arranges Japanese currency at the World Currency Shop in Tokyo, Japan, on December 20, 2006.
Tomohiro Ohsumi | Bloomberg | Getty Images

The safe-haven yen fell to two-week lows against the dollar on Thursday as the United States and Iran moved away from an all-out conflict, prompting investors to take on more risky assets and focus more on an upcoming U.S.-China trade deal.

U.S. President Donald Trump responded to an Iranian attack on U.S. forces with sanctions, not violence. Iran offered no immediate signal it would retaliate further against a Jan. 3 U.S. drone strike that killed its senior military commander.

The yen, seen as a safe haven in times of geopolitical turmoil because of its deep liquidity and Japan's current account surplus, reversed the gains it made against the dollar after Iran's missile strike. The dollar was last up 0.3% at 109.48 yen, after earlier hitting 109.57 yen, its highest since Dec. 27.

"Markets are taking comfort from a cooling in U.S.-Iran tensions after conciliatory words from President Trump," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. "The Mideast crisis going from a boil to a simmer allowed bullish U.S. fundamentals to return to the surface."

Gold prices also slid, retreating further from a near-seven-year peak scaled in the previous session.

Implied volatility gauges for euro/dollar are falling back toward late 2019 lows, which is "very telling," according to Reuters analysts.  Three-month implied volatility in euro/dollar fell to 4.27% at the end of November, its lowest level on record.

Focus is expected to shift back to the global economy, with expectations the United States and China will sign a trade deal next week providing underlying support for risk assets. China's Vice Premier Liu He, head of the country's negotiation team in the Sino-U.S. trade talks will visit Washington on Jan. 13-15, Gao Feng, spokesman at the commerce ministry said.

Investors think the deal will clear one of the world economy's biggest uncertainties and help boost global growth this year, although some think that view is too optimistic.

Market participants are also looking ahead to Friday's U.S. non-farm payrolls report, with forecasts of 164,000 new jobs in December, from 266,000 the previous month.

In other currencies, China's yuan rose to a five-month high of 6.9175 against the dollar overnight in the offshore market, boosted by a steady inflation readout. In midday trading, the dollar index was 0.2% higher on the day at 97.458.

The Swiss franc though remained slightly elevated against the dollar, which slipped 0.2% to 0.9721 .