Safe-Haven Yen, US Dollar Rally on Escalating Middle East Tension

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) -The U.S. dollar rallied from an eight-month low on Monday, while the yen rose against most currencies, as geopolitical tension in the Middle East intensified, prompting investors to seek safe-haven shelter.

Volume was lighter than usual, with UK markets closed for a public holiday.

The Swiss franc also advanced after Israel and Hezbollah fired missiles at each other over the weekend in one of the biggest clashes in more than 10 months of border conflict.

“Geopolitical tension, absolutely, is a factor. Israel and Lebanon moved the market for sure,” said Amo Sahota, executive director at Klarity FX in San Francisco. “Oil prices rallied pretty significantly about 3%. They were down last Friday, so that recovery has benefited some currencies such as the yen, Swiss franc, and the Canadian dollar.”

In afternoon trading, the U.S. dollar index, a gauge of the dollar’s value against six major currencies, advanced 0.2% to 100.84, rising from its lowest since late December of 100.53.

Against the yen, the dollar was flat to slightly higher at 144.51. It earlier dropped to a three-week low of 143.45.

The euro fell versus the Japanese currency, down 0.1% at 161.45 yen, while the Swiss franc tumbled 0.7% to 169.97 yen.

Helen Given, FX trader at Monex USA in Washington, said overall the yen had gained more than the other safe havens, particularly against the dollar, as it continued to benefit from an expected U.S. interest rate cut next month, which was confirmed by Federal Reserve Chair Jerome Powell last Friday in a hawkish speech in Jackson Hole, Wyoming.

That prompted traders to seal bets of a 25 basis point (bps) rate cut in September and even boost expectations of a super-sized 50 bps rate cut.

“Powell comes in and sounds really quite alarmist, in a way, particularly his comments around employment reports,” said Klarity’s Sahota.

“His comments had nothing about slow, gradual rate cuts. He seemed to be giving an open letter to say that if data suggests, we will go hard and we will go fast.”

The dollar recovered a bit against the yen after data showed U.S. durable goods orders surged 9.9% in July, after falling in June. However, non-defense capital goods orders excluding aircraft, a closely-watched proxy for business spending plans, dipped 0.1% after a downwardly revised 0.5% increase in June.

The euro eased 0.3% against the dollar to $1.1161. Sources told Reuters that ECB policymakers are lining up behind another rate cut on Sept. 12.

The risk-off sentiment also weighed on the Australian and New Zealand dollars and the Norwegian crown, which were all lower against the dollar.

At the same time, the risk-off stance benefited the Swiss franc. The dollar slipped 0.1% against the Swiss franc to 0.8469 francs. The euro also fell 0.3% against the Swiss currency to 0.9454.

Sterling, meanwhile, slid 0.2% against the dollar to $1.3192 after jumping as far as $1.3229 on Friday for the first time in 17 months. Bank of England head Andrew Bailey said on Friday it was “too early to declare victory” over inflation, signalling a less aggressive stance on interest rate cuts than the Fed.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Kevin Buckland in Tokyo and Sruthi Shankar in Bengaluru; Editing by David Evans, Kirsten Donovan and Rosalba O’Brien)