A recent Israeli strike targeted Iran's nuclear enrichment facilities and high-ranking Revolutionary Guard members. Despite the severity, no rise in radiation levels has been observed. The United States confirmed it was informed about the operation but did not authorize it. Although President Trump had warned of potential action, media coverage suggested an attack wasn’t imminent. In the financial world, the dollar is showing strength across both G10 and many emerging market currencies, though gains are modest, sparking debate over its safe-haven appeal. Equities are under pressure globally, with European markets dropping between 1.0% and 1.5%, and U.S. futures showing similar losses. Asian markets declined as well, though to a lesser degree.

Asia Pacific Markets

The Asia Pacific region showed mixed responses following the Israeli action. In Japan, the yen initially strengthened, with the dollar falling to a six-day low, before rebounding toward JPY144. Correlation between the yen and U.S. 10-year yields is increasing again, suggesting a return to more traditional market behavior. Economic data remains fragile—Japan revised down its industrial output and reported only a slight uptick in services activity. Despite firm inflation data, the Bank of Japan appears cautious about rate hikes and may instead scale back its bond purchases.
Meanwhile, the Australian dollar, which had recovered slightly after recent losses, dropped in reaction to the Israeli attack but is now stabilizing above $0.6480 in the European morning.

European Markets

European financial markets were significantly impacted by the geopolitical tensions. The euro initially surged to levels not seen since October 2021, touching $1.1630, but then fell sharply following the Israeli strike, dipping to near $1.1510. Economic indicators also weighed on sentiment—April's industrial production in the eurozone plunged by 2.4%, and the trade surplus was halved. Growth prospects appear to be cooling, with forecasts predicting minimal expansion in the coming quarters.
Meanwhile, the British pound hit a three-year high despite lackluster job data and a steep GDP contraction in April. Sterling weakened slightly after the strike and lost ground to the euro, which reached its highest point against the pound since early May.

American Markets

In the U.S., the dollar rebounded, reversing recent declines and approaching key resistance near 98.50. While it recovered some strength, questions remain about its status as a safe-haven asset. Market participants are cautious in drawing conclusions too quickly. Economic data due today includes the preliminary University of Michigan consumer sentiment survey, which may show slight gains in confidence and expectations of lower inflation. Fed Chair Powell has previously referenced this survey, but its influence has diminished. Market-based inflation expectations are relatively low, with one-year breakevens near 2.5% and longer-term ones hovering around 2.3%, indicating subdued inflation pressures despite global volatility.