Global Markets React Amid Middle East Conflict and Political Shifts in Europe and New Zealand

Global Markets React Amid Middle East Conflict and Political Shifts in Europe and New Zealand

The dollar remained close to a one-week high on Monday, reflecting a delicate market sentiment amidst the ongoing conflict in the Middle East, which bolstered demand for the safe-haven currency.

Despite attempts at arranging a ceasefire to facilitate the exit of foreign passport holders and the delivery of aid to the besieged Palestinian enclave, Israeli forces continued their bombardment of Gaza.

While the dollar index slightly receded by 0.084% to 106.47, it remained near the recent highs recorded on Friday. Investors awaited Federal Reserve Chair Jerome Powell’s upcoming speech later in the week, seeking hints about the future of U.S. interest rates.

Danske Bank’s chief analyst, Jens Peter Sørensen, noted, “The conflict between Israel and Hamas continues and is providing volatility to the financial markets with the traditional safe-haven flows. This has to be held against the theme of higher-for-longer regarding global monetary policy.”

On the other hand, the Israeli shekel plummeted to its lowest level in more than eight years, trading at 3.99 per dollar. This decline followed Prime Minister Benjamin Netanyahu’s declaration to “demolish Hamas” on Sunday.

Conversely, the euro and sterling experienced a slight relief, bouncing back from their one-week lows against the dollar recorded on Friday. The euro edged up by 0.2% to $1.05231, while the sterling gained 0.15% to $1.2163.

In Europe, Poland’s zloty saw a rally against the euro, reaching its highest point in two months, with a gain of 1.15% at 4.4778.

The ruling nationalists in Poland appeared to have lost their parliamentary majority in the recent crucial election, potentially opening the door for opposition parties to seize power. Analyst Lukazs Janczak from Erste Group in Poland highlighted the positive initial market reactions to this development, pointing out the strengthening of the Polish zloty. He suggested that investors may anticipate a more amenable attitude towards the European Union from the potential new government.

In New Zealand, the centre-right National Party, led by Christopher Luxon, secured a new government with its preferred coalition party ACT following Saturday’s general election. Consequently, the New Zealand dollar rose by 0.55% to $0.5917.

The yen remained stable at 149.54 per dollar, near the critical 150-level. Some traders anticipated potential intervention from Japanese authorities to support the yen if it weakens beyond this level.

Japan’s top currency diplomat, Masato Kanda, emphasized that authorities would take necessary action in the event of excessive movements in the yen, highlighting that interest rates are only one factor influencing exchange rates. Kanda also reaffirmed the yen’s status as a safe asset, alongside the Swiss franc and the U.S. dollar.

Analysts suggested that carry trades funded by the yen could be significantly affected by any further escalation in Israel’s conflict, as investors, who have been shorting the yen to invest in higher-yielding currencies, may repurchase it as a safe-haven asset.

James Malcolm, head of FX strategy at UBS in London, emphasized, “Obviously war is inflationary, disrupts growth, and threatens risk assets.” He further pointed out the potential vulnerability in the dollar-yen trade, where the Bank of Japan (BOJ) might need to adjust its strategy, given the significant amount of carry trade involved, which has now reached nearly half a trillion dollars.

Despite market speculation about the BOJ’s potential shift from its accommodative stance, the central bank has continued to maintain its ultra-easy policy settings.

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