By Joice Alves
LONDON The dollar held near a one-week high on Monday with fragile sentiment against a backdrop of conflict in the Middle East supporting demand for the safe-haven currency.
Israeli forces kept up their bombardment of Gaza on Monday after diplomatic efforts to arrange a ceasefire to allow foreign passport holders to leave and aid to be brought into the besieged Palestinian enclave failed.
The dollar index eased 0.084% to 106.47, but held close to highs touched on Friday, with investors also waiting to hear a speech by Federal Reserve Chair Jerome Powell later this week for clues on the U.S. interest rate outlook.
"The conflict between Israel and Hamas continues and is providing volatility to the financial markets with the traditional safe-haven flows. This has to be held against the theme of higher-for-longer regarding global monetary policy," said Jens Peter Sørensen, chief analyst at Danske Bank.
The Israeli shekel slid to a more than eight-year low of 3.99 per dollar, after the country's Prime Minister Benjamin Netanyahu vowed on Sunday to "demolish Hamas".
The shekel has fallen more than 4% against the dollar since gunmen from the Palestinian group Hamas rampaged through Israeli towns on Oct. 7.
There was some respite for the euro and sterling, which were off one-week lows touched on Friday against the dollar. The euro was last 0.2% higher at $1.05231. Sterling gained 0.15% to $1.2163.
ELECTION WEEKEND
Poland's zloty rallied against the euro to its highest in two months, and was last up 1.15% at 4.4778.
The ruling nationalists in Europe's largest emerging economy appeared to have lost their parliamentary majority in the nation's most pivotal election in decades on Sunday, potentially opening the way for opposition parties to seize power.
Lukazs Janczak, analyst at Erste Group in Poland, called the first reactions in markets positive.
"This is indicated by the currency market, where the Polish zloty is strengthening, and it seems that what investors may assume...is that the potential government...will have a more open attitude towards the European Union".
Meanwhile, New Zealand's centre-right National Party led by Christopher Luxon will form a new government with its preferred coalition party ACT after Saturday's general election.
The New Zealand dollar rose 0.55% to $0.5917.
YEN WATCHING
The yen was flat at 149.54 per dollar, close to the sensitive 150-level. Some traders see an increased potential for Japanese authorities to intervene to support the yen if it weakens past that level.
On Friday, Japan's top currency diplomat Masato Kanda said authorities will take appropriate action against a backdrop of excessive moves in the yen when needed, adding interest rates are merely one factor in determining exchange rates.
The yen is still perceived as a safe asset along with the Swiss franc and U.S. dollar, Kanda added.
Carry trades funded by the yen could be the biggest casualty of further escalation in Israel's war, analysts said, as global investors who have for months been shorting the yen to invest in higher-yielding currencies buy it back as a safe-haven.
"Obviously war is inflationary, disrupts growth and threatens risk assets," said James Malcolm, head of FX strategy at UBS in London.
"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."
The BOJ has continued to maintain its ultra-easy policy settings although markets are rife with speculation that it could move to gradually exit from the accommodative stance sooner rather than later.
(Reporting by Joice Alves. Additional reporting by Rae Wee, Vidya Ranganathan; Editing by Kirsten Donovan and Emelia Sithole-Matarise)