Foreign Exchange News: Middle East Fears Drive Dollar Gains, Israel’s Next Move Crucial

October 3, 2024 - Written by David Woodsmith

STORY LINK Foreign Exchange News: Middle East Fears Drive Dollar Gains, Israel’s Next Move Crucial

The dollar has posted significant net gains over the past 24 hours, primarily due to an escalation in Middle East tensions and defensive demand for the US currency.

Iran launched a wave of missiles against Israel in response to Israel’s killing of the Lebanese Hezbollah leader.

There was a spike in risk aversion with a jump in oil prices which boosted the dollar.

The Pound to Dollar (GBP/USD) exchange rate dipped to 1.3260 before a tentative recovery to 1.3295 amid hopes that further escalation could be avoided.

Markets will inevitably be wary in the short term, especially as Israel will respond with some form of attack on Iran.

The scale and scope of this response will be crucial for markets. An aggressive response would trigger fresh fear and defensive dollar demand.

A more measured stance would provide some relief.

ING commented; “The situation remains highly volatile, but if Israel’s response is not too aggressive (perhaps refraining from targeting Iran’s nuclear infrastructure), markets may take the view that both countries are for the second time this year preferring to de-escalate after a brief hostile exchange.”

MUFG expects a measured overall Iranian stance; “Our research team in the Middle East remain of the view that there is very little appetite on the part of Iran to seriously escalate any conflict. Of much greater strategic importance for Iran is advancing its nuclear program as the best option to safeguard the survival of the current regime.”

It added; “So we remain sceptical of there being any serious further escalation to the conflict that turns this into a wider Middle East war.”

According to Danske Bank; “In our view, the best-case scenario is something like what happened in April. Then Iran launched missiles that were completely intercepted, and Israel responded with a missile attack on Iran that also caused very limited damage.”

It does, however, note the risk of more destabilising scenarios and dollar gains.

As far as US data is concerned, the ISM manufacturing index held in contraction territory at 47.2 and slightly below consensus forecasts with a reported decline in unemployment and prices.

The JOLTS data recorded an increase in job openings to 8.04mn from a revised 7.71mn and above market expectations of 7.64mn.

According to Danske Bank; “Hiring continued to slow, though the number of involuntary layoffs also declined. Thus, the reading suggested that labour markets conditions are not weakening sharply.”

MUFG noted that the quits rate declined to the lowest level since July 2015 when the covid-period is ignored.

According to the bank; “That’s compelling evidence of the direction of wage growth going forward. Coupled with the ISM Prices Paid Index falling sharply from 54.0 to 48.3 in September the data certainly will further ease concerns over inflation risks amongst FOMC members.”

Markets expect a further 25 basis-point rate cut in November.

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TAGS: Pound Dollar Forecasts