As Middle East tensions rose and investors anticipated hints from Federal Reserve Chair Jerome Powell’s speech later this week, the dollar fell from its highs in Asian trade on Monday but continued to trade at high levels.

In contrast to the euro and pound, the dollar held close to a one-week high as risk sentiment remained shaky. The euro yesterday moved up 0.13% to $1.05265 after Friday’s decline sent it to a one-week low of $1.0496. After hitting a one-week low on Friday of $1.2123, sterling increased by 0.13% to $1.2160.

To 106.49, the dollar index decreased 0.07%. David Chao, the global market strategist for Asia Pacific ex-Japan at Invesco, described the situation in Israel as a regional war that normally has little immediate influence on financial markets.

“I don’t think it will change the main economies’ growth paths or make the Fed more hawkish, in my opinion. Given the increased risks, the Fed will be less likely to tighten.

After Israeli Prime Minister Benjamin Netanyahu promised on Sunday to “demolish Hamas” as his soldiers prepared to enter the Gaza Strip, the shekel fell to a more than eight-year low of 3.99 to the dollar.

Since Israeli cities were attacked on October 7 by Palestinian militants from Hamas, the shekel has decreased by more than 3% versus the dollar.

The yen was recently 0.1% higher against the dollar, trading at 149.39 instead of the crucial 150-point. If the yen declines over that point, some traders believe there is a higher likelihood that Japanese authorities may step in to support the currency.

According to analysts, carry trades financed by the yen may suffer the greatest losses from any escalation of the conflict, as foreign investors who have been shorting the yen for months to invest in more lucrative currencies purchase it back as a haven. James Malcolm, director of FX strategy at UBS in London, stated that it is “obviously true that war inflates prices, stunts economic growth, and endangers risk assets.”

“The largest overhang I can see in this regard is dollar-yen, where the BOJ must pivot regardless and the carry trade that has built up now amounts to nearly half a trillion dollars.”

Although markets are replete with speculation that the BOJ might gradually disengage from the accommodating posture sooner rather than later, the BOJ has maintained its ultra-easy policy settings. The yield gap between the yen and the dollar may close if the BOJ begins its departure, but that would depend on how the Fed decides to set U.S. interest rates.

After data last week showed consumer prices grew more than anticipated in September, traders eagerly expected Powell’s address to the Economic Club of New York later this week for hints on how much further U.S. interest rates may rise.

According to the CME FedWatch tool, markets are widely anticipating the Fed to leave rates on hold when it delivers its next monetary policy decision in November. Still, they estimate a 32% likelihood the central bank will raise rates in December.

After falling 1.4% the the previous week, the Australian dollar, sometimes considered a barometer for risk appetite, increased in value by 0.45% to $0.63255.

To $0.5923, the New Zealand dollar increased by 0.65%. After the general election on Saturday, the center-right National Party of New Zealand, led by Christopher Luxon, will form a new government with the support of the ACT party. Prime Minister Chris Hipkins has already acknowledged his Labour Party’s inability to do so.

The opposition National Party of New Zealand won with a resounding and definitive victory, according to Kyle Rodda, senior financial market analyst at Capital.com. As a result, the Kiwi currency increased. “Excluding the populist New Zealand First party, it looks like the Nationals can capture power with just one coalition partner.

“The kiwi has jumped on the prospect such dysfunction has been avoided.”