• Iran fires missiles at Israel in retaliation move
• Dollar, yen and gold attract safe-haven flows
• Oil rebounds on supply concerns
• Wall Street pulls back ahead of key US data

Dollar turns into safe have as Iran attacks Israel

After Powell’s boost on Monday, the dollar extended its gains against most of its peers on Tuesday, with the only currency resisting the dollar’s strength being the Japanese yen.

Having said that though, the catalyst wasn’t receding bets about a back-to-back double rate cut by the Fed, but Iran’s missile attacks on Israel in retaliation for Israel’s operations against Tehran’s Hezbollah allies in Lebanon. The dollar turned into a safe haven, benefiting from risk aversion, and this is evident by the fact that Treasury yields, which usually move in tandem with the dollar, pulled back.

What is also supporting the case of haven flows into the dollar is that yesterday’s US data was not that encouraging. The ISM PMI held steady into contractionary territory in September, with both the prices and employment subindices further declining, allowing investors to continue assigning a decent 40% probability of a back-to-back 50bps rate cut by the Fed at the November gathering.

The next tests for investors’ rate cut bets may be the ISM non-manufacturing PMI on Thursday, and Friday’s nonfarm payrolls. Nonetheless, with Israel and the US pledging to retaliate against Iran, fears of a larger conflict may keep the greenback and other safe havens, like the yen, supported for now.

Fears of a larger conflict may keep the greenback and other safe havens, like the yen, supported for now

Gold prepares for new records, oil rebounds strongly

The safe haven of choice during the Middle East saga seems to have been gold, with the precious metal rebounding more than 1% yesterday, notwithstanding the dollar's gains. Should market participants remain concerned about a bigger war, gold is likely to continue marching north and conquer new uncharted territory. Even if geopolitical tensions ease at some point, the yellow metal may be destined to extend its rally as most major central banks around the world are expected to continue lowering interest rates.

Yesterday’s attacks had the biggest impact on oil, with WTI crude prices rebounding more than 8% from yesterday’s lows on worries that further escalation in the Middle East could disrupt output from the region. Lately, oil markets were mostly concerned about the weakening global economic outlook, but the latest geopolitical developments and China’s willingness to revive economic activity may allow the rebound to continue for a while longer.

The latest geopolitical developments and China’s willingness to revive economic activity may allow the rebound to continue for a while longer

Wall Street pulls back, euro slips on ECB cut bets

All three of Wall Street’s main indices felt the heat of the missile attack, with the Nasdaq losing the most ground. However, the broader uptrends are not threatened yet. Even if the retreat continues for a while longer, investors may be tempted to buy again on new evidence that the US economy remains in good shape.

With the Fed placing extra emphasis on the labor market lately, a decent jobs report on Friday may revive appetite, even if the data translates into less aggressive rate reductions moving forward.

A decent jobs report on Friday may revive appetite, even if the data translates into less aggressive rate reductions moving forward

Elsewhere, the euro tumbled after Eurozone inflation dropped below 2% for the first time since 2021 and after ECB President Lagarde said before parliament that the latest developments strengthen their confidence about inflation returning to their target soon and that this should be reflected in the upcoming policy decision. This prompted traders to fully price in 25bps worth of rate cuts at each of the October and December gatherings.