By Harry Robertson and Rae Wee
LONDON/SINGAPORE (Reuters) – Investors rushed into the Swiss franc and Japanese yen – long seen as safe haven currencies – on Friday after reports that Israel had attacked Iran in the latest retaliatory exchange between the two adversaries, pushing up oil prices and causing caution in global markets.
People familiar with the matter told Reuters that Israel attacked Iran, days after Iran launched an unprecedented attack on Israel in response to a suspected Israeli attack on its consulate in Syria, even though Iran has downplayed the incident and said it had no plans for a new response.
Markets initially reacted sharply to the news, which triggered a sell-off in risky assets, sent oil and gold prices soaring and triggered a rally in U.S. Treasuries and safe-haven currencies.
The Swiss franc, prized in times of stress for its stability, jumped more than 1% after the first reports arrived, hitting 0.9011 per dollar, its highest in two weeks.
It later pared gains, gaining about 0.5% to 0.9079 for the dollar as markets retraced some of their initial reaction after a relatively subdued response from Iran.
The , which tracks the currency against six major currencies, also rose but then gave up its gains to settle down 0.1% at 106.07.
Iranian state media reported that three drones over the central city of Isfahan were shot down and a senior Iranian official said there were no plans for immediate retaliation. The Israeli leadership and army remained silent on Friday.
“My perception is that the Iranian media has basically downplayed the whole thing,” said Francesco Pesole, currency strategist at ING. “(That) could be an indication that they don’t want to escalate further.”
He added: “This is speculation because the news we receive is not entirely clear… obviously the situation will remain unstable.”
ASIAN CURRENCIES UNDER PRESSURE
The yen rose about 0.2% to 154.39 per dollar, after rallying more than 0.6% in reaction to news of the attack.
“It’s quite obvious that the market is nervous,” said Moh Siong Sim, currency strategist at the Bank of Singapore. “We’re still in a situation where we know something happened. But we need to understand the degree of retaliation.”
Currencies rebounded during the European morning session, with the euro initially falling before rising 0.1% to $1.06505. The British pound remained stable at $1.2441.
The general theme of the last few weeks has been the rising US dollar on the back of a strong US economy. The euro has fallen 1.3% this month, while the pound has fallen 1.5%.
The hot data, particularly last week’s data showing inflation rose to 3.5% in March, has caused traders to quickly scale back their bets on the Federal Reserve’s interest rate cuts this year for serve two reductions, most likely starting in September. That caused U.S. bond yields to surge, taking them to their highest since November earlier this week.
Asian currencies have been under particular pressure, and financial chiefs of the United States, Japan and South Korea this week issued a rare trilateral warning about the two Asian nations’ falling exchange rates, raising the prospect of potential joint intervention.
Bank of Japan Governor Kazuo Ueda said Thursday that the central bank could raise interest rates again if the yen’s decline significantly pushed up inflation, highlighting the impact currency movements could have on the timing of the next policy change.
Ueda’s comments come ahead of the BOJ’s monetary policy meeting next week. Data on Friday showed Japan’s core inflation fell to 2.6% year-on-year in March, from 2.8%, but remained above the central bank’s 2% target.