The dollar rose against most major currencies as currency market participants had their first opportunity to respond to Hamas's sudden attacks on Israel.

The U.S. dollar, often viewed as a safe haven during difficult situations, strengthened by 0.2% against the euro and the British pound, while risk-sensitive currencies like the Aussie and New Zealand dollar weakened.

Meanwhile, the Norwegian krone was one of the best-performing major currencies as oil prices surged more than 5%, which, in turn, strengthened Norway's export outlook.

Instability in the Middle East has the potential to add further negative impact on the U.S. dollar, which has shown outstanding performance in recent months. This rise in the dollar's value has also sparked discussions in Europe about the possibility of the euro returning to its previous parity position, as well as causing the yen to weaken to around 150 per dollar.

"The easiest path in the short term is a stronger dollar due to heightened risks," said Jason Wong, a currency strategist at BNZ in Wellington. However, given the magnitude of the dollar's strengthening, he noted, "there's a high likelihood that the dollar will experience a decline in a relatively short time."

The Bloomberg Index measuring the U.S. dollar has risen by as much as 2.1% this year, heading towards its third consecutive year of increases, marking the longest period of gains since 2016. This index rose by 0.1% on Monday.

The impact of the attacks became evident in the Middle Eastern markets on Sunday, resulting in a decline in stocks. The main TA-35 index in Israel recorded its largest loss in over three years, dropping by 6.5%.

Elsewhere, the Mexican peso, often seen as a proxy for emerging markets and carry-trade strategies, weakened nearly 1% against the dollar.

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Fed's Hawkish Stance

The dollar rose due to aggressive interest rate hikes by the Federal Reserve and the resilience of the U.S. economy.

According to strategists, the crisis in the Middle East has added an extra geopolitical risk factor in bond trading, although inflation remains a key driver in the debt markets.

U.S. bond futures rose by 32/10 on Monday, while cash trading was closed due to a holiday in the United States. The yield on 10-year Australian bonds fell by as much as seven basis points after opening but ultimately erased that movement.

"Demand for the dollar remains high, and uncertainty regarding growth and inflation continues," wrote Bob Savage, head of market strategy at BNY Mellon Capital Markets, in a note. "It’s more likely we will witness an escalation of conflict rather than a good resolution, both domestically and internationally, in markets and economic policies, as well as monetary and fiscal policies."


Warning!

This analysis is based on fundamental and technical perspectives from reliable sources and is not intended as advice or an invitation. Always remember that this content aims to enrich the reader's information. Always conduct your own research regarding other forex information to use as a reference in your trading.

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