Middle East Violence Already Having a Growing Impact on Currencies

What began with the assassination of Ahmed Jabari on Wednesday turns into a wider conflict and is already making an impact on currencies.

The recent rockets on Tel Aviv and Jerusalem add to the lack of breakthroughs on the fiscal cliff and with Greece. The greenback is marching forward, EUR/USD is swinging to lows and the yen manages to stabilize.

The Israeli operation called “Pillar of Cloud” (translation from Hebrew), or “Pillar of Defense” (in communications to foreign media) began with bombing of long range missiles in Gaza. On the other side, Hamas and other Palestinian factions have fired rockets on Israel. The total death toll is rising towards 20 at the time of writing.

A significant escalation came on Thursday, as alarms were heard in Tel Aviv, Israel’s main city and business center, for the first time since the Gulf War. On Friday, alarms were heard also in the capital Jerusalem. So far, nobody was hurt nor any damage was inflicted in these cities.

16,000 reserve Israeli soldiers were called for immediate service, in what seems like a preparation to a massive ground operation in the Gaza strip.

Renewed efforts for a truce are being made, but it seems that it might get worse before it gets better.

There is always worry that a limited conflict could spread through the Middle East, especially as Egypt’s president said that “Israel will pay a dear price”. The price of oil is rising.

Currencies

The news about rockets in Tel Aviv and in Jerusalem were met with immediate responses of a stronger US dollar – safe haven flows. Also the ride of USD/JPY has slowed, as the Japanese yen also enjoys safe haven flows, despite political turmoil in Japan.

Yet, it’s important to remember that the Mid-East news go with the trend: Greece could leave the euro-zone now that the US elections are behind us, and a public split within the troika is seen. The IMF could even potentially ditch the troika.

The talks about the fiscal cliff in the US just began, and it will certainly take time until any deal (a good one or a bad one) will be reached – most probably in the last minute.

EUR/USD dropped exactly to the 1.2690 line before climbing above 1.27. The low of the week is 1.2660.

Further reading: 5 Reasons Why Greece Could Leave the Euro-Zone After the US Elections

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