Yen, Dollar, Euro, Aussie, and Kiwi React as Investors Lose Risk Appetite Amid Growing Political Tensions

Risk-averse Japanese yen and US dollar climbed higher on Tuesday as other risk-sensitive currencies as the New Zealand dollar fell alongside the euro, amid growing concerns over a potential Russian invasion of Ukraine and a hastened policy tightening by the Federal Reserve.

The Australian dollar climbed briefly following a strong consumer price data release, which boosted the likelihood for a Reserve Bank interest rate hike in 2022. However, the AUD finally buckled to the sell-off across riskier assets.

Meanwhile, the US Fed begins its two-day policy meeting later today, with investors watching developments from this meeting closely to find clues on the timing of the proposed rate hikes. The focus will also be on how fast the apex bank plans to shrink its over $8 trillion Treasuries and mortgage debt.

Markets Have Priced In a Fed Rate Hike in March

Capital markets have already priced in a rate hike in March, with three others set to follow through the year. Commenting on the Fed interest rate hike intentions, head of FX strategy at National Australia Bank in Sydney, Ray Attrill, noted:

“The case for the Fed potentially following up a March rate rise before the June meeting – even as early as April – is a very compelling one, and there is a risk that the market will still have to reprice.

The geopolitical risk has just added a new layer of safe-haven support.”

In other news, until recently, the financial markets remained unaffected by the massing of Russian troops on Ukrainian borders. With tensions heightening significantly recently, markets have taken effect of the political tensions.

Francesco Pesole, a Bank strategist at ING, recently mentioned that markets were pricing in something like a risk premium into the euro, as spectators fear that the increasing standoff between Russia and the West over Ukraine could cause Moscow to taper energy supply to Europe.