Dollar rises on flight to safety amid Israel-Palestinian fighting

LONDON/SINGAPORE  – The safe-haven dollar and Japanese yen inched higher on Monday as military clashes between Israel and the Palestinian Islamist group Hamas deepened political uncertainty across the Middle East.

Risk sentiment was fragile after Israeli forces fought gunmen from the Palestinian group Hamas over the weekend, hours after the militants launched an attack on Israel in the deadliest day of violence in the country for 50 years.

The Israeli shekel was last roughly 2.5 percent lower at 3.9325 per dollar after the Bank of Israel announced it would sell up to $30 billion of foreign currency in the open market to maintain stability. The shekel tumbled earlier more than 3 percent to an almost eight-year low of 3.9880 per dollar.

READ: Bank of Israel to sell $30B of forex to stabilize shekel amid Gaza war

The dollar index was last 0.33 percent higher at 106.57, while the Japanese yen – another traditional safe-haven currency – edged 0.1% higher to 149.15 per dollar, in thinned Asian trade, with Japan closed for a holiday.

“If a war breaks out anywhere in the world it is a good idea to hold U.S. dollars. It can therefore come as no surprise that the greenback started trade last night with some gains,” said Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank.

The dollar also drew support from Friday’s data showing U.S. employment increased by the most in eight months in September, potentially setting up for a higher-than-expected inflation print later this week.

“The resoundingly strong employment report will likely keep the (Federal Open Market Committee) on guard as it watches for signs that a tight labor market could prevent inflation from returning to 2 percent on a sustained basis,” economists at Wells Fargo said.

“Another rate hike before the end of the year is a possibility, but for now our base case remains that the last rate hike of the tightening cycle occurred in July.”

READ: Fed keeps rates steady, toughens policy stance as ‘soft landing’ hopes grow

Market pricing shows a roughly 78 percent chance that the Federal Reserve will keep rates on hold at its November policy meeting, according to CME Group data.

Elsewhere, risk-sensitive euro and sterling fell against the broadly strengthening dollar. The euro dropped 0.6 percent to trade at $1.0522, while sterling fell 0.5 percent to $1.2167.

Data showed on Monday that German industrial production fell slightly more than expected in August by 0.2 percent compared to the previous month, rising recession fears in the euro zone.

The Australian dollar, seen as a proxy for risk appetite, slid 0.45 percent to $0.6356.