Dollar slips on US-Iran deal hopes: risk-on vs risk-off explained

The dollar weakened on Monday as hopes for a US-Iran deal pushed oil lower and lifted risk appetite. The ECB reference rate for EUR/USD rose 0.39% to 1.1216 in the 2 November fixing, up from 1.1172 on 30 October, while USD/MXN fell 1% to 18.72.

The trigger came from Tehran. investingLive reports that Iranian President Pezeshkian said the Supreme Leader had granted the government some authority on dialogue, and that markets saw a risk-on reaction, with oil and the dollar moving lower. investingLive also reports, citing Al-Sharara news agency, that the two sides were reportedly nearing a preliminary agreement. Investing.com notes the pound gained as the dollar slipped on Iran diplomacy bets. Our sister site has more on how the Iran deal hopes and Tuesday's midterms shaped the dollar.

What is risk-on vs risk-off?

"Risk-on" and "risk-off" describe the mood of the market. In a risk-on mood, investors feel confident. They buy assets that can grow but can also fall hard, such as stocks and the currencies of emerging markets (developing economies like Mexico). In a risk-off mood, investors feel worried. They sell those assets and move money into places seen as safer.

News such as war, peace talks or a sudden market shock can flip the mood quickly. A sign that a conflict may ease often brings risk-on trading. In today's case, investingLive describes the reaction to the Iran headlines as risk-on.

The pattern is a tendency, not a rule. Other forces can push currencies the other way on the same day.

A worked example

All numbers below are ECB fixings from 30 October and 2 November. A fixing is one official rate per business day, not a live quote.

EUR/USD (the euro rose, the dollar fell):

• 1.1216 − 1.1172 = 0.0044, or 44 pips (a pip is 0.0001 here).
• 0.0044 ÷ 1.1172 = 0.39%.
• At the old fixing, 1,000 euros cost $1,117.20. At the new one, they cost $1,121.60, or $4.40 more.

USD/MXN (the peso rose, a classic risk-on move):

• 18.908 − 18.72 = 0.188 pesos.
• 0.188 ÷ 18.908 = 0.99%, rounded to 1%.
• $1,000 bought 18,908 pesos on 30 October but only 18,720 pesos on 2 November, or 188 fewer. The peso got stronger. See the USD/MXN chart.

USD/JPY (the yen weakened): the fixing rose from 157.25 to 157.90, up 0.65 yen or 0.41% (0.65 ÷ 157.25). A softer yen also fits a risk-on day, since the yen is often bought when investors are nervous.

The picture was not perfectly tidy. USD/CHF fell 0.40% to 0.8196, so the Swiss franc gained against the dollar. AUD/USD slipped 0.23% to 0.7008 and NZD/USD fell 0.17% to 0.5627. Investing.com reports that the Canadian dollar slipped from a six-week high as the oil retreat offset the weaker US dollar. Lower oil can hurt currencies linked to commodities even on a risk-on day.

Why it matters for new traders

Mood can move many currency pairs at once. If you only watch one pair, you may miss that the real driver is a headline about something else entirely, such as oil or diplomacy.

Mood can also change fast. investingLive says the coming hours were described as decisive for the reported agreement. US data also matters: investingLive reports the ISM manufacturing index rose to 55.5 against a 54.5 estimate. And Tuesday brings the US midterm elections, which investingLive says will decide control of Congress. Any of these can shift sentiment again.

Finally, check whether a move fits the risk pattern. When it does not, as with the franc and the Australian dollar today, another factor is usually at work.

Key terms

• Risk-on: a confident market mood where investors buy riskier assets.
• Risk-off: a worried market mood where investors seek safer assets.
• Emerging-market currency: the currency of a developing economy, such as the Mexican peso.
• Pip: the smallest standard price step, 0.0001 for EUR/USD.
• ECB fixing: the European Central Bank's official daily reference rate, not a live price.