On November 8th, The International Atomic Energy Agency(IAEA) is due to publish an updated report about Iran’s nuclear program. It is expected to provide new and worrying details about Iran’s nuclear capabilities. Towards this event, news about an upcoming Israeli attack on Iran have emerged.
The chances of an airstrike to happen are low. 5 reasons are detailed below. But if tensions rise, how will this impact currencies?
Why a strike has low chances:
- Israeli threats add to pressure on sanctions: The Western countries will want to increase sanctions on Iran, while Russia and China are reluctant to do so. Raising the threat to attack puts pressure for more sanctions and helps the US and its allies.
- Israeli government under internal pressure: The J14 social justice movement continues to be very active. The government led by Netanyahu managed to divert attention from the recent protest on October 29th through a mini-escalation in Gaza. Keeping Iran in the headlines also helps move public attention to external enemies and diverts attention from internal economic issues. Also the release of abducted soldier Gilad Shalit has a lot to do with this internal pressure. But will the government go ahead with a strike? Probably not – polls show that only half of the population supports an attack, and that most Israelis are convinced it will trigger a full scale conflict. So it’s better to keep the media busy with threats, but to avoid acting.
- No US Approval for an Israeli strike: It is hard to believe that Israel will act on its own in attacking Iran. In the past, the different US administration gave Israel a clear red light regarding such an attack. The US may express concern about Israel doing it on its own, but it also goes to show that there is no US approval. In addition, it is uncertain if a full scale destruction of the Iranian nuclear plans can happen without military assistance from the US.
- The US doesn’t need another war: The US economy is still in dire straits, despite some encouraging signs seen lately. Obama just announced a retreat from Iraq. Allocating resources to the same region once again will strain the US budget, just as the super committee is trying to find ways to reduce the deficit, and isn’t having a lot of success. Another war, even if the US participation is limited, will put a lot of pressure on US finances one year before the elections, and when the US is finally showing some signs of recovery.
- Iran also prefers to focus on external enemies: The Arab spring has also reached the Islamic Republic. Protests were crushed also in Teheran a few months ago. But now there are tensions within the ruling elite that have been surfacing. Keeping tension high with the US and Israel means less awareness of internal issues. The Iranians certainly want tension and it recently said that they will cause “1 million Israeli casualties with only 4 missiles”. But a full escalation isn’t desired also in Tehran.
- The US dollar and Japanese yen will jump as safe haven currencies: they are the clear safe havens at the moment.
- Euro, pound, Aussie, kiwi to crash: these are the clear risk currencies at the moment. The mess in Greece and now in Italy already weighs heavily on the euro and has a strong impact on the others.
- The Canadian dollar will drop: While Canada exports oil which will clearly rise in case of a Middle Eastern conflict, the Canadian dollar tends to behave more like a risk currency.
- The Swiss franc will swing: uncertainty is lower regarding the franc: on one hand, it has moved to the camp of risk currencies since the huge SNB intervention. But on the other hand, it could switch back to the “safe haven” camp in case of a conflict in the Middle East. This is what happened when the Libyan civil war broke out.
What do you think can happen?
- How Middle East Violence Impacts Forex – from a previous time of tension.
- Who’s Right about Iran? Doomsayers or Naysayers? – An interesting analysis of the situation.