What we thought would be the summer doldrums instead turned into a bit of a geopolitical tension this week.
After the United Nations Security Council unanimously approved a new round of sanctions against North Korea last weekend, the tit-for-tat between North Korea and the United States was the main focus this week for financial markets.
North Korean leader Kim Jong-Un responded to the sanctions with further threats to the U.S., and the U.S. responded with "fire and fury" verbiage.
The financial market naturally responded with a minor risk-off sentiment. Stocks closed in slightly negative territories, with U.S. Treasury yields modestly declining.
Typically, in a heightened geopolitical risk environment, the U.S. dollar acts as the world's safe-haven currency. And indeed, the greenback regained some of its strength this week while the Korean Won (KRW) was naturally one of the biggest losers in the market, dropping more than a full percentage point.
What was interesting was that right after the news on Tuesday, it was the Swiss Franc (CHF) that out-performed the greenback as the safest haven currency, strengthening about 1.2 percent more than the dollar. The franc, gold and crypto-currencies were the main beneficiaries amid the heightened tensions.
The Japanese Yen (JPY), also a safe-haven currency, initially did not strengthen that much given its closer proximity to North Korea, but later in the week, it also outperformed both the USD and the CHF, as the Japanese corporations brought their money back to their homeland.
Given the relatively minor financial market response, it seems that global investors so far do not believe that North Korea's threat is real.
While North Korea has one of the largest military institutions in the world, its whole land area is smaller than of the state of Mississippi. Its population is 25 million, just less than 8 percent of the total U.S. population, and 40 percent of its people are malnourished, according to the United Nations.
U.S. Defense Secretary James Mattis said that North Korea would be “grossly outmatched" by the U.S. in any conflict or arms race. That is true - and the financial market understands that.
My View: The dollar's traditional role as the world's safe-haven currency was seemingly diminished this week. That may be due to the fact that the U.S. was directly involved in this verbal war with North Korea. Global investors are calmly watching events regarding the threats, so perhaps there is no need for Washington to take further action to diminish the U.S. dollar's role.
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