Euro, yen slide as Middle East conflict escalates
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March 2 : The euro and yen fell on Monday as concerns about higher oil prices dented the currencies of countries most exposed to energy shortages, while the dollar also benefited from a safe-haven bid on concerns about conflict in the Middle East widening.
The U.S. and Israeli air war against Iran widened on Monday, with no end in sight as Israel attacked Lebanon in response to strikes by Hezbollah, and Tehran kept up its missile and drone attacks on Gulf states.
Brent crude futures rose as much as 13 per cent and were last up 7.3 per cent on the day at $77.77 per barrel.
“It's mostly about exposure to oil,” said Steve Englander, head of global G10 FX research and North America macro strategy at Standard Chartered Bank’s New York branch. “The biggest dollar move came after the headlines that there had been some attacks on the oil facilities in the Gulf."
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Qatar halted its production of liquefied natural gas on Monday, prompting precautionary shutdowns of oil and gas facilities across the Middle East.
Europe and Japan are more exposed to higher energy costs than the U.S., which is a net energy exporter.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.31 per cent to 98.37, with the euro down 0.85 per cent at $1.1712.
The dollar strengthened 0.7 per cent to 157.13 against the Japanese yen.
BoJ Deputy Governor Ryozo Himino said growing market volatility would not prevent the central bank from raising rates, arguing that it was inappropriate to automatically tie its policy decision to market developments.
The U.S. currency also benefited from a safe-haven bid as traders analysed how long the conflict is likely to last and how it will ultimately turn out.
“The key thing is just the uncertainty,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “The endgame is unclear.”
U.S. President Donald Trump said on Monday he ordered the attack on Iran to thwart its nuclear and ballistic missile programs, vowing to pursue the war for as long as necessary.
Concerns that higher inflation will push back the date when the Federal Reserve next cuts interest rates also boosted the dollar.
A rate cut is no longer fully priced in until September, compared to previous expectations of July, based on pricing in the Fed funds futures market. Traders continue to price in two 25 basis-point cuts by year-end.
The Swiss National Bank said it was more willing to intervene in foreign currency markets after the conflict in the Middle East pushed the Swiss franc to its highest level against the euro in more than a decade.
The dollar strengthened 1.2 per cent to 0.778 francs. The euro was up 0.24 per cent against the Swiss currency at 0.91, after earlier reaching its strongest in 11 years at 0.9035 to the euro.
The risk-sensitive Australian dollar weakened 0.14 per cent versus the greenback to $0.7103.
In cryptocurrencies, bitcoin gained 4.92 per cent to $68,920.
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