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Dollar surges as investors seek safety amid Israel-Hamas war 

The U.S. dollar index (DXY) rebounded above 106 on Monday, ending a three-day decline driven by heightened geopolitical tensions in the Middle East due to war between Israel and Palestinian Islamist militant group Hamas, as a surge in geopolitical risks prompted investors to seek the safety of the greenback.  

The DXY, which measures the performance of the dollar against six major currencies, was last 0.26% higher at 106.32, while the Japanese yen (USD/JPY) — another traditional safe-haven currency — edged 0.1% higher to 149.16 per dollar, in thin Asian trade, with Japan closed for a holiday.  

Gold also saw a boost, with three-month futures for the yellow metal rising 1% in Monday trading. Gold and the USD moving upward together has been a rare occurrence in the past 18 months, as a robust dollar typically exerts downward pressure on gold and other commodity prices. 

Over the weekend, Hamas launched a surprise attack on Israel, spurring a series of retaliatory actions from the latter and resulting in a combined death toll exceeding 1,000 on both sides. On Sunday, Israel declared a formal state of war for the first time since 1973, setting the stage for a major military operation in Gaza. 

Concerns also arose regarding a potential broader conflict, with allegations of Iranian involvement in the attacks. Despite the recent gains, the dollar saw a nearly 1% decrease against a basket of other currencies in the preceding three sessions, partly due to reduced expectations of further monetary tightening by the Federal Reserve (Fed). This drop occurred despite surprising job growth of 336,000 in September, indicating the resilience of the U.S. economy in the face of prolonged higher interest rates. 

 

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DXY forecast: Analysts see gains for safe-haven USD on global uncertainty 

"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," Ulrich Leuchtmann, Head of FX and Commodity Research at Frankfurt-based Commerzbank, told Reuters in a comment on Monday. 

In a dollar forecast issued on October 9, Chris Turner, Global Head of Markets at Dutch bank ING, wrote that the war’s effect on oil prices and the potential for further escalation in the region may add further support to the USD: 

 

“The horrific events in southern Israel this weekend have seen oil prices rise and concerns will undoubtedly build over an escalation in the region. As Warren Patterson discusses in his oil note today, questions will be asked as to Iran's involvement in the Hamas attack and how both Israel and the US respond. At around three million barrels per day, Iran is proving to be this year's key marginal supplier of oil, and a further geopolitical risk premium could be built into crude should sanctions against Iranian crude be enforced more vigorously or any more direct form of response take place.

Higher oil prices will add further support to the dollar in that they will weigh on global growth, and the IMF should lower global growth forecasts this week. They will also add to inflationary pressure, which will be most acute in the US given the least spare capacity. They will again drive a wedge between the 'haves' (US) and the 'have nots' (Europe and Asia) when it comes to oil self-sufficiency.”

 

Turner added that the DXY index would likely find “good support” in the 106 area this week: 

 

“Away from developments in Israel, Friday delivered a very strong US jobs report which looks set to keep the Federal Reserve in hawkish mode for a little longer. The data will also keep US Treasuries under pressure in a week in which we see $101 billion of three, ten and thirty-year Treasuries being auctioned. 5% US ten-year Treasury yields remain a very real threat and stand to tighten financial conditions still further. Other US highlights this week include a whole host of Fed speakers (Fed hawk Lorie Logan speaks at 3:00 pm CET today), FOMC minutes on Wednesday, and both CPI and PPI data releases. None of these look particularly threatening to dollar long positions.

On balance, we expect DXY to find good support near 106.00 this week. It looks as though the dollar can stay strong into year-end despite November and December being seasonally weak months for the dollar.”

 

In a DXY technical analysis, FXStreet contributor Pablo Piovano wrote that recent price action indicated the U.S. dollar index could go on to challenge the 2023 top of 107.34: 
 
 

“Considering the ongoing price action, extra gains appear likely in the dollar for the time being. Once the index clears the 2023 top of 107.34 (October 3), it could encourage bulls to challenge the weekly peak at 107.99 (November 21 2022) just ahead of the round level at 108.00.”

 

Data from the U.S. Commodity Futures Trading Commission revealed that net long positions on the dollar reached a one-year high. The net long dollar position amounted to $10.55 billion for the week ending October 6. 

However, investors are not anticipating another interest rate hike from the Federal Reserve in November, as indicated by data from the CME Group’s FedWatch tool. Markets are currently pricing in an 85% probability that the Fed will maintain interest rates within their 5.25-5.5% range at its policy meeting next month. 

 

"The key debate is whether the U.S. dollar's inverse relationship with risk appetite will become more pronounced again. Its inability to capitalise on healthy U.S. labour market data brings that thinking to the fore," said Paul Mackel, Global Head of FX Research at HSBC.

 

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.

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