Euro and yen slide as Middle East conflict escalates

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.-Israeli air war against Iran expanded on Monday with no end in sight, as Israel attacked Lebanon in response to strikes by Hezbollah, and Tehran fired missiles and drones at Gulf states and a British air base as far away as Cyprus.

Brent crude futures rose as much as 13% and were last up 7.6% on the day at $78.64 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."

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 United States, 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 0.59% to 98.65, with the euro down 1.08% at $1.1686.

Against the Japanese yen, the dollar strengthened 1.1% to 157.74.

BoJ Deputy Governor Ryozo Himino said the 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.”

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.

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 1.5% to 0.78 Swiss francs, while the franc was at its strongest for 11 years at 0.9032 to the euro. 

The risk-sensitive Australian dollar weakened 0.77% versus the dollar to $0.7058.

In cryptocurrencies, bitcoin gained 5.43% to $69,271.