(Bloomberg) -- The dollar strengthened against most of its major peers as currency traders got their first chance to react to a shock attack by Hamas within Israel.

The greenback — seen as a haven in times of trouble — advanced 0.2% versus the euro and pound, while risk currencies such as the Aussie and kiwi weakened. The Norwegian krone was the best-performing major currency as oil jumped more than 5%, bolstering the outlook for Norway’s exports. 

Instability in the Middle East has the potential to add another leg to the US currency’s already stellar performance in recent months. That rally has reignited discussion in Europe about whether the euro may once again fall to parity, while sending the yen to as weak as 150 per dollar. 

“The path of least resistance over the very short term is dollar strength on lower risk appetite,” said Jason Wong, a currency strategist at Bank of New Zealand in Wellington. But given the scope of the rally in the dollar, “there’s a reasonable chance it fizzles out relatively quickly,” he said.

A Bloomberg gauge of the US currency has advanced 2.1% this year, heading for a third annual gain. That would be the longest winning since 2016. The gauge was 0.1% higher Monday.

Fallout from the attacks reverberated through Middle East markets on Sunday, sending stocks sliding. Israel’s benchmark TA-35 stock index posted its biggest loss in more than three years, falling 6.5%. Elsewhere, the Mexican peso, often seen as a proxy for emerging markets and carry-trade strategies, weakened nearly 1% against the dollar.  

Hawkish Fed

The dollar has benefited from the Federal Reserve’s aggressive interest-rate increases as well as resilience in the US economy. 

Strategists say the Middle East crisis has added an extra geopolitical risk factor to bond trading, though inflation remains the key driver of debt markets.

US Treasury futures rose 10/32 Monday, while cash trading is shut for a US holiday. Australian 10-year yields slid as much as seven basis points just after the open before erasing the move.

The “dollar bid holds and the confusion over growth and inflation continues,” Bob Savage, head of markets strategy at insights at BNY Mellon Capital Markets, wrote in a note. “We are more likely to see an escalation of conflict than a resolution both at home and abroad, in markets and in economics, in monetary and fiscal policy.”

--With assistance from Vivianne Rodrigues, Michael O'Boyle and Garfield Reynolds.

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