Dollar Rises as Middle East Tensions Boost Safe-Haven Status
The safe-haven U.S. dollar gains amid Middle East conflict escalation
The U.S. dollar is gaining strength in early European trade on Monday as tensions in the Middle East escalate, dampening risk sentiment. The conflict follows a strong payrolls report from last week, further boosting the dollar’s safe-haven status.
At 03:00 ET (07:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, is trading 0.4% higher at 106.204.
Dollar demand surges amidst attacks on Israel
The recent deadly attacks by militants from the Palestinian group Hamas on several Israeli towns have led to an increase in demand for the U.S. dollar. In response, Israeli air strikes have targeted numerous locations in Gaza, resulting in the deadliest day of violence in the country in 50 years.
The yen has also received support as a safe-haven currency, although trading ranges have been limited due to Japan’s holiday. Meanwhile, the Israeli shekel has fallen to an almost eight-year low against the U.S. dollar, prompting the Bank of Israel to announce its first-ever sale of foreign exchange, up to $30 billion, to maintain stability.
This move has quickly calmed the market, with the shekel-dollar pair falling back to 3.9063, marking a 1.8% increase.
Upcoming CPI data could reinforce the Fed’s hawkish tone
The release of stronger-than-expected employment data last week has already benefited the U.S. dollar. With indications of a tight labor market, the focus now shifts to this week’s release of September data. Hot inflation figures could further reinforce the Federal Reserve’s message that interest rates need to remain higher for a longer period.
In August, the Consumer Price Index (CPI) showed the fastest increase in 14 months, primarily driven by a surge in gasoline prices. However, core inflation, which excludes food and fuel costs, rose at the slowest pace in nearly two years.
German industrial output and its impact on the euro
The euro has fallen 0.4% to 1.0541, with the single currency being negatively affected by weakened risk sentiment following the attacks on Israel. This decline is exacerbated by the sharp jump in oil prices, which has a particularly negative impact on Germany, the dominant economy in the eurozone, due to its high exposure to energy costs.
Additionally, German industrial output has contracted for the fourth consecutive month, dropping 0.2% compared to the previous month. The statistics office revised July’s production data to a 0.6% decline month-on-month, slightly better than the initial estimate of a 0.8% drop.
Other currencies affected by risk sentiment
Other risk-sensitive currencies have also taken a hit, with the Australian dollar falling 0.5% to 1.2179, the New Zealand dollar dropping 0.6% to 0.6345, and the Canadian dollar falling 0.4% to 0.5963.
Overall, the escalation of the conflict in the Middle East has bolstered the safe-haven status of the U.S. dollar, while other currencies have experienced downward pressure due to weakened risk sentiment. The upcoming CPI data release and German industrial output figures will likely continue to influence currency movements in the near future.
