FOREX-Soleimani strike lifts safe-haven yen; grim U.S. data hits dollar

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By Kate Duguid
NEW YORK, Jan 3 (Reuters) - Investors rushed into safe-haven
assets on Friday after U.S. air strikes in Iraq killed a senior
Iranian military official, sending the Japanese yen to a
three-month high, while the U.S. dollar index was knocked by the
weakest domestic factory activity in a decade.
In addition to the yen, U.S. Treasuries, German bunds and
gold rallied after the overnight air strike in Baghdad killed
Qassem Soleimani, Tehran's most prominent military commander and
the architect of its growing military influence in the Middle
East. "Overall, geopolitical risk premia have risen substantially
overnight," said Karl Schamotta, chief market strategist at
Cambridge Global Payments. Investors were "really looking for
safe havens and a port in the storm," he added.
The Japanese yen JPY= had risen as high as 107.82 per
dollar and was last up 0.48% on the day at 108.04. The yen is
often seen as a haven from risk, given Japan's status as the
world's largest creditor nation. A holiday in Tokyo also made
for thin conditions, exaggerating the move.
The U.S. dollar index .DXY initially benefited from the
move into safe-haven assets, but those gains were erased after
the Institute for Supply Management (ISM) reported that the
manufacturing sector contracted significantly in December. It
was last up 0.03% on the day at 96.873.
The attack sparked concerns about crude supply disruptions,
lifting oil prices more than $3. Petrocurrencies gained slightly
on the higher crude prices, but those were then largely offset
by the overall move away from risk, said Schamotta. The U.S. manufacturing sector contracted in December by the
most in more than a decade, with order volumes crashing to a
near 11-year low and factory employment falling for a fifth
straight month, according to a report from ISM released on
Friday. "That is a depressing number," said Schamotta.
It suggests "trade war-related uncertainty has actually
damaged the manufacturing sector on a sustained basis and that
points to weakness in GDP, particularly in the coming quarter
because what you're likely to see is an inventory drawdown as
opposed to continued build."
The longer-term effects on the dollar are unclear. Though it
weakened Friday, the greenback may ultimately benefit if slower
U.S. manufacturing dents hopes for global growth in 2020.
"The idea that other countries that are large exporters to
the U.S. might see a large rebound in the near term - that idea
is losing traction here," said Schamotta.