USD forecast: Middle east conflict lifts safe-haven dollar

Dollar surges as investors seek safety amid Israel-Hamas war

The U.S. dollar index (DXY) rebounded above 106 on Monday, ending a three-day decline driven by heightened geopolitical tensions in the Middle East due to war between Israel and Palestinian Islamist militant group Hamas, as a surge in geopolitical risks prompted investors to seek the safety of the greenback.

The DXY, which measures the performance of the dollar against six major currencies, was last 0.26% higher at 106.32, while the Japanese yen (USD/JPY) — another traditional safe-haven currency — edged 0.1% higher to 149.16 per dollar, in thin Asian trade, with Japan closed for a holiday.

Gold also saw a boost, with three-month futures for the yellow metal rising 1% in Monday trading. Gold and the USD moving upward together has been a rare occurrence in the past 18 months, as a robust dollar typically exerts downward pressure on gold and other commodity prices.

Over the weekend, Hamas launched a surprise attack on Israel, spurring a series of retaliatory actions from the latter and resulting in a combined death toll exceeding 1,000 on both sides. On Sunday, Israel declared a formal state of war for the first time since 1973, setting the stage for a major military operation in Gaza.

Concerns also arose regarding a potential broader conflict, with allegations of Iranian involvement in the attacks. Despite the recent gains, the dollar saw a nearly 1% decrease against a basket of other currencies in the preceding three sessions, partly due to reduced expectations of further monetary tightening by the Federal Reserve (Fed). This drop occurred despite surprising job growth of 336,000 in September, indicating the resilience of the U.S. economy in the face of prolonged higher interest rates.

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DXY forecast: Analysts see gains for safe-haven USD on global uncertainty

"If a war breaks out anywhere in the world it is a good idea to hold U.S. dollars. It can therefore come as no surprise that the greenback started trade last night with some gains," Ulrich Leuchtmann, Head of FX and Commodity Research at Frankfurt-based Commerzbank, told Reuters in a comment on Monday.

In a dollar forecast issued on October 9, Chris Turner, Global Head of Markets at Dutch bank ING, wrote that the war’s effect on oil prices and the potential for further escalation in the region may add further support to the USD:

Turner added that the DXY index would likely find “good support” in the 106 area this week:

In a DXY technical analysis, FXStreet contributor Pablo Piovano wrote that recent price action indicated the U.S. dollar index could go on to challenge the 2023 top of 107.34:

Data from the U.S. Commodity Futures Trading Commission revealed that net long positions on the dollar reached a one-year high. The net long dollar position amounted to $10.55 billion for the week ending October 6.

However, investors are not anticipating another interest rate hike from the Federal Reserve in November, as indicated by data from the CME Group’s FedWatch tool. Markets are currently pricing in an 85% probability that the Fed will maintain interest rates within their 5.25-5.5% range at its policy meeting next month.

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