Dollar Gains Ground as Investors Seek Safe Havens Following Israel Attack

Following a surprise attack by Hamas within Israel, the US dollar demonstrated strength against most of its primary counterparts, reflecting currency traders’ immediate response to the sudden Middle East conflict escalation.

Renowned as a safe haven during turbulent periods, the US dollar saw a 0.2% rise against the euro and pound. Conversely, riskier currencies like the Australian and New Zealand dollars witnessed declines. Meanwhile, as oil prices surged by more than 5%, the Norwegian krone emerged as the top-performing major currency, indicating optimism regarding Norway’s exports.

The prevailing instability in the Middle East may further bolster the US dollar’s impressive performance in recent months. This rally has spurred discussions in Europe about the potential for the euro to once again reach parity with the dollar, while also pressuring the yen to weaken towards 150 per dollar.

Jason Wong, a currency strategist at Bank of New Zealand in Wellington, observed that “the path of least resistance over the very short term is dollar strength on lower risk appetite.” However, he cautioned that the dollar’s rally could lose momentum rapidly given its substantial gains.

Measured by a Bloomberg gauge, the US dollar has advanced by 2.1% this year and is poised for its third consecutive annual gain, marking its longest winning streak since 2016. On Monday, the gauge registered a 0.1% increase.

The unforeseen attacks had a significant impact on Middle East markets, causing a sharp decline in stock prices. Israel’s benchmark TA-35 stock index experienced its most substantial loss in over three years, plummeting by 6.5%. Meanwhile, the Mexican peso, often considered a representative for emerging markets and carry-trade strategies, weakened by nearly 1% against the dollar.

The robust performance of the US dollar can be attributed to the Federal Reserve’s assertive interest-rate increases and the resilience of the US economy.

Market strategists suggest that the Middle East crisis has introduced an additional geopolitical risk factor to bond trading, although inflation remains the primary influence on debt markets.

US Treasury futures gained 10/32 on Monday, while cash trading was closed due to a US holiday. Initially, Australian 10-year yields dropped by as much as seven basis points before reversing the movement.

Bob Savage, head of markets strategy at BNY Mellon Capital Markets, emphasized that “the dollar bid holds and the confusion over growth and inflation continues.” He added that “we are more likely to see an escalation of conflict than a resolution both at home and abroad, in markets and in economics, in monetary and fiscal policy.”