US dollar surges against euro on flight to safety amid Israel-Palestinian fighting

THE safe-haven US dollar rose on Monday (Oct 9) against the euro and sterling, 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 2 per cent lower at 3.9151 per US dollar, after the Bank of Israel announced it would sell up to US$30 billion of foreign currency in the open market to maintain stability. Earlier in the day, the shekel tumbled more than 3 per cent to an almost eight-year low of 3.9880 per US dollar.

The US dollar index was last 0.25 per cent higher at 106.49. The index, which measures the greenback against six peers, had posted its first weekly decline on Friday after 11 consecutive weeks of gains.

The Japanese yen – another traditional safe-haven currency – edged 0.1 per cent higher to 149.16 per US dollar in thinned Asian trade, with Japan closed for a holiday.

The euro and sterling each fell 0.5 per cent against the broadly strengthening greenback. The euro dropped to US$1.0531, and sterling dipped to US$1.2169.

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“If a war breaks out anywhere in the world it is a good idea to hold US 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 US dollar also drew support from Friday’s data showing US employment increased by the most in eight months in September, potentially setting up for a higher-than-expected inflation print later this week.

Net long positions on the US dollar rose to a one-year high, according to US Commodity Futures Trading Commission data released on Friday.

The value of the net long US dollar position was US$10.55 billion for the week ended Oct 6.

But investors are not expecting another hike from the Federal Reserve in November, according to CME Group data. Market pricing shows a roughly 78 per cent chance that the Fed will keep rates on hold at its November policy meeting.

“The key debate is whether the US dollar’s inverse relationship with risk appetite will become more pronounced again. Its inability to capitalise on healthy US labour market data brings that thinking to the fore,” said Paul Mackel, global head of FX Research at HSBC.

Rekindling recession fears in the eurozone, data showed on Monday that German industrial production fell slightly more than expected in August, by 0.2 per cent compared to the previous month.

The Australian dollar, seen as a proxy for risk appetite, slid 0.4 per cent to US$0.6359.

In Asia, China’s yuan held firm against the US dollar on the first trading day after the Golden Week holiday, underpinned by a stronger-than-expected official guidance fix.

The offshore yuan rose 0.2 per cent to 7.2943 per US dollar.