Dollar gains versus euro as Israel-Palestinian conflict spurs safety bid

By Herbert Lash and Joice Alves

NEW YORK/LONDON (Reuters) -The safe-haven dollar rose on Monday against the euro as military clashes between Israel and the Palestinian Islamist group Hamas raised concerns that the conflict might widen beyond Gaza, but the dollar eased against other major currencies.

Israel's response to the multi-pronged attack by Palestinian gunmen from the Gaza Strip will "change the Middle East," Prime Minister Benjamin Netanyahu said on Monday.

Risk sentiment was fragile as Israel said it had called up 300,000 reservists and was imposing a total blockade of the Gaza Strip in a sign of a potential ground assault in response to the weekend attack by Hamas.

The Israeli shekel weakened about 3.1% to 3.9550 per dollar after the Bank of Israel announced it would sell up to $30 billion of foreign currency in the open market to maintain stability. Earlier, the shekel tumbled to an almost eight-year low of 3.9880 per dollar.

"It's a little bit of risk aversion, not a wholesale panic and not a huge amount of sell-off, but just a little bit of a move towards safety as markets wait to see how things develop," said Brad Bechtel, global head of FX at Jefferies in New York.

"What we've been getting used to over time is the fact that geopolitical events typically have a very short-lived market impact," Bechtel added.

The euro fell 0.19% to $1.0566 but the dollar index, a measure of the U.S. currency against six others, retreated 0.16% after earlier trading higher.

The Japanese yen, another traditional safe-haven currency, edged higher 0.57% higher to 148.47 per dollar. Japan was closed for a holiday.

As long as the conflict is contained to Israel and Hamas, "we can go back and focus on the economic fundamentals," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

"I'm still not convinced that the geopolitics is going to drive the markets," Chandler added.

Sterling rebounded from earlier losses to trade slightly higher at 1.224 against the U.S. dollar, which also lost ground against the Canadian, Australian and New Zealand dollars, along with the Norwegian krone and Swedish krona.

The dollar drew support from Friday's data showing U.S. employment increased by the most in eight months in September, potentially setting up for a higher-than-expected inflation print on Thursday.

Net long positions on the dollar rose to a one-year high, according to U.S. Commodity Futures Trading Commission data released on Friday.

The value of the net long dollar position was $10.55 billion for the week ended Oct. 6.

But investors are not expecting another hike from the Federal Reserve in November, according to CME Group data. Futures are pricing an 88.6% probability that Fed policymakers keep rates on hold at its November policy meeting.

"The key debate is whether the U.S. dollar's inverse relationship with risk appetite will become more pronounced again. Its inability to capitalize on healthy U.S. labor market data brings that thinking to the fore," said Paul Mackel, global head of FX research at HSBC.

The dollar index posted its first weekly decline on Friday after 11 consecutive weeks of gains.

Rekindling recession fears in the euro zone, data showed on Monday that German industrial production fell slightly more than expected in August, by 0.2% compared to the previous month.

In Asia, China's yuan held firm against the dollar on the first trading day after Golden Week holiday, underpinned by a stronger-than-expected official guidance fix.

The offshore yuan fell 0.24% to 7.2915 per dollar.

(Reporting by Herbert Lash, additional reporting by Joice Alves in London, Rae Wee in Singapore; Editing by Christina Fincher, Mark Potter, Will Dunham and Leslie Adler)

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