The U.S. Dollar extended its gains on Wednesday, benefiting from increased safe-haven demand as geopolitical tensions in the Middle East worsened. The greenback saw its sharpest weekly rise, with the Dollar Index climbing 0.5% overnight, its largest jump since late September. Investors sought refuge in the Dollar following an Iranian missile attack on Israel, an escalation that has heightened fears of a broader regional conflict.
Iran reportedly fired over 180 ballistic missiles at Israel, in what was described as retaliation for Israeli strikes against militant leaders and actions in Lebanon involving Hezbollah. While no injuries were reported, the potential for further escalation remains significant as Israel's military gears up for a ground assault against Hezbollah. The increasing risks prompted investors to abandon riskier assets, favoring the Dollar and other safe-haven currencies such as the Japanese Yen, which remained steady at 143.45 per dollar, and the Swiss Franc, which hovered at 0.8463 per dollar.
Meanwhile, other currencies struggled under the weight of risk aversion. The Euro fell below $1.10 after experiencing its steepest decline in almost four months. The New Zealand Dollar dropped 1.1% overnight to $0.6283, while the Australian Dollar slipped to $0.6883, though some upbeat domestic retail sales data offered limited support.
Rising oil prices, which jumped 2.5% in response to potential supply disruptions, further pressured commodity-linked currencies and amplified fears of inflationary pressures. Analysts at ANZ pointed out that further market moves will largely depend on how Israel responds, particularly if actions escalate towards targeting Iran's military or oil assets.
Sterling also faced downward pressure, losing 0.7% overnight before stabilizing at $1.3278 in early Asian trade. The focus on geopolitical risk has overshadowed domestic factors, and traders are waiting to see if the situation will escalate further or if calm will return to the markets.
In parallel, economic developments showed mixed signals. Despite the turmoil, U.S. job openings data came in stronger than expected, supporting the Dollar’s rise. However, in New Zealand, a survey indicating a rapid cooling in price pressures increased the likelihood of a 50 basis point rate cut by the central bank, with markets now pricing in a 77% chance of such a move.
Adding to global uncertainty, the U.S. is facing an emerging domestic issue as dockworkers on the East and Gulf Coast initiated their first large-scale strike in nearly fifty years, disrupting about half of the country’s ocean shipping flow. This strike adds another layer of risk, potentially impacting supply chains and economic activity at a crucial time.
As the day progresses, the market's attention will also turn to a vice presidential debate between Democrat Tim Walz and Republican JD Vance, along with the release of U.S. private payrolls data. These events, while typically significant, are taking a backseat to the unfolding geopolitical crisis.
The Dollar's resilience in this environment highlights its role as a global safe haven, particularly as investors brace for further developments in the Middle East. Until there is more clarity on both geopolitical and economic fronts, risk appetite is likely to remain muted, with the greenback continuing to attract demand from those seeking stability amid the growing uncertainty.
