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Monday July 17, 2006 - 10:28:01 GMT
Reuters - www.reuters.com

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FOREX-Dollar rallies as Middle East tensions escalate

FOREX-Dollar rallies as Middle East tensions escalate
Mon Jul 17, 2006 6:18am ET14

(Updates with latest price action, adds quotes, changes byline)

By Natsuko Waki

LONDON, July 17 (Reuters) - The dollar rose one percent against European currencies and hit a three-month high versus the yen on Monday, as investors fled risky assets and sought safe havens as Middle East tensions escalated.

The Japanese currency was also weaker against European currencies on expectations the Bank of Japan would tighten monetary policy at a glacial pace. The BOJ raised interest rates on Friday from near zero for the first time in six years.

Israeli air strikes killed 23 people in Lebanon on Monday in the sixth day of violence, while tensions continued between Western powers and Iran over Tehran's nuclear programme.

This is prompting investors to sell off risky assets such as stocks and buy gold, oil and U.S. Treasuries, all of which are priced in dollars and traditionally thought of as safe havens.

"Certainly the dollar seems to be receiving a bit of boost from an uptick in risk aversion on the back on tensions in the Middle East," said Todd Elmer, currency strategist at Citigroup.

"Undoubtedly in the wake of the BOJ policy decision we see some moderate pressure on Japanese yields as there was some disappointment in the bank's rhetoric. There is no surprise it will translate into some yen weakness."

The euro was down more than 0.9 percent at $1.2528 by 1000 GMT, its lowest since June 29. It had been as high as $1.2861 earlier this month before the flare-up in geopolitical tensions.

The dollar rose 0.9 percent to trade as high as 117.17 yen , with gains accelerating in Europe with Japanese markets closed for a holiday.

The dollar was up 1 percent at 1.2476 Swiss francs and $1.8200 per sterling .

Gold climbed to its highest level in almost two months, hitting a high near $676 an ounce, while oil prices traded at record prices, with Brent crude hitting $78.18 a barrel.

The safe-haven bid helped the dollar overcome soft U.S. economic data on Friday, which seemed to lessen the chance of further Federal Reserve rate hikes.

KEY EVENTS AHEAD

Some analysts noted a further escalation in geopolitical tensions could be negative for the dollar partly as rising oil prices would hit U.S. growth.

"In the medium-term if we see geopolitical tensions remain at a heightened level that will actually be a negative for the dollar as we will likely see a slowing of global portfolio flows," said Ian Stannard, currency strategist at BNP Paribas.

On the macroeconomic front, the Federal Reserve's view should become clearer when Chairman Ben Bernanke testifies to the Senate Banking Committee on Wednesday.

"Over the past several weeks the positive correlation between dollar and rate spreads is reasserting itself. There is some uncertainty on a potential August hike," Elmer said.

The June consumer price report is also due on Wednesday. Median forecasts are for a 0.2 percent gain in both the headline and core rates, but anything higher would rekindle talk of a tightening and tend to support the dollar.

Euro zone producer price data for May and final consumer inflation data for June is due at 0900 GMT, but this week's main focus for the bloc will be the German ZEW index of investor confidence on Tuesday.

Market focus was also on the yen following last week's quarter-percentage point Japanese rate increase.

The yen hit 8-year lows against sterling and the Swiss franc on Monday.

The New Zealand dollar firmed to one-month highs at about US$0.6226 after annual domestic inflation hit a near six-year high of 4.0 percent.

© Reuters 2006. All Rights Reserved

 

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