Dollar extends gains as Middle East tensions rise

NEW YORK - The dollar jumped 1 per cent against most European currencies and hit a three-month high versus the yen on Monday as rising Middle East tensions drew investors to the world’s premier reserve currency.

By (Reuters)

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Published: Mon 17 Jul 2006, 10:46 PM

Last updated: Sat 4 Apr 2015, 3:11 PM

Israel bombarded Lebanon for a sixth day while tensions continued between Western powers and Iran over Tehran’s nuclear program. The dollar extended its gains and rose to session highs against the euro after data showed that output at US factories rose at twice the forecast pace in June.

Analysts said that there was little sign of big flows out of risky assets and into safe havens, with bond yields largely steady, but the rising tensions had led many investors to buy back dollars to cover short positions.

“Right now the trend is your friend and nobody wants to be short dollars when they don’t know if things are going to deteriorate further in the Middle East,” said Michael Woolfolk, senior currency strategist at Bank of New York.

Woolfolk said that Asian investors in particular had been buyers of the dollar in recent sessions.

The Japanese yen was weaker across the board, extending losses made on Friday after the Bank of Japan raised interest rates for the first time in six years, but indicated that it was in no hurry to raise rates again any time soon.

The euro had fallen 1 per cent on the day to $1.2525 EUR by mid-morning in New York trade, around its lowest since June 29. It had risen as high as $1.2861 earlier this month before the flare-up in Middle East tensions.

The dollar rose 0.8 per cent to 117.10 yen JPY, extending gains after Friday’s BOJ meeting. The yen hit eight-year lows against sterling GBPJPY the Swiss franc CHFJPY. Japanese markets were closed for a holiday on Monday.

The dollar rose 1.1 per cent to 1.2485 Swiss francs CHF, while sterling fell 1 per cent to 1.8195 GBP.

Analysts say that while rising global tensions should continue to support the dollar, the market’s attention will likely return to the economy this week.

The main focus will be Wednesday, when investors will take a close look at consumer prices data, and testimony from Federal Reserve Chairman Ben Bernanke to the Senate Banking Committee.

Investors will be looking for any signs of an uptick in inflation to gauge whether the Fed is likely to extend its two-year monetary tightening campaign with another rate rise to 5.5 per cent at its next meeting in August.

This week’s main focus for the euro zone will be the German ZEW index of investor confidence on Tuesday.

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