How Will Eastern European Currencies React to the Hamas-Israel Conflict?

When it comes to the emerging market currencies in Central and Eastern Europe (CEE), risk sentiment is of central importance. “A higher risk appetite among market participants”, explains the European Central Bank (ECB), “tends to lead to inflows of capital into emerging markets”, and this props up their currencies.

This was illustrated in September 2023, when traders believed the US Federal Reserve would keep interest rates high for the time being, supported by data showing the economy was on a solid footing. The natural response was a drop in risk appetite, which weighed on the MSCI gauge of emerging market currencies, making Q3 its worst quarter of the year. The Hungarian forint lost as much as 4% in the seven currency trading sessions preceding September 27th.

Another factor pushing down on CEE currencies was a strong rally in crude oil prices. The improvements in inflation Poland and Hungary have been seeing in recent months have, to a large extent, lower energy prices to thank. It was largely on this power that the forint gained 9.3% against the US dollar in the first five months of 2023. But, when energy gets costlier, it’s often bad news for CEE currencies, as we saw in September.

These considerations matter very much to our question for today: What is the Hamas-Israel conflict likely to do to CEE currencies down the line? A full 20% of the world’s oil supply originates in the Middle East. There’s no way of knowing how much oil prices will be impacted by the conflict, but some analysts foresee the price of an oil barrel surging to $150. As to risk sentiment, this is liable to suffer in the extreme in the event of a wider Middle Eastern conflict. So, for those of us with an interest in online currency trading with CEE currencies, how much of a tumble should we anticipate?

Interest Rates

In mid-September, the ECB made the decision to hike interest rates again, which renewed traders’ concerns about euro zone growth. Stubborn inflation was making it increasingly likely the economy would have to suffer a severe downturn in order to get prices under control. And the impact of that downturn would be magnified in Eastern Europe relative to elsewhere, in the opinion of Goldman Sachs. Indeed, Romania, Czech Republic, Bulgaria, and Hungary all saw their currencies lose ground against the USD in the week of the rate hike.

Not only that: inflation itself is expected to linger longer in Eastern Europe than the west and, according to Piotr Arak of the Polish Economic Institute, CEE currencies are particularly sensitive to inflation. Therefore, assuming the Hamas-Israel conflict sparks a hike in energy prices and inflation, nations in the CEE are more likely to feel its effects when they pay for groceries. They’re also more likely to see their economies held back in general by the resultant high interest rates.


In spite of much talk of the global trend to de-dollarization, the USD has been looking robust since the end of the summer. The dollar index gained more than 5% between July and September. ING say that “This dollar strength is starting to look unwelcome in that inflation fears have not entirely receded in the rest of the world”. The conflict in Israel could reinforce the unfortunate trend, however, because, when risk goes out of fashion, safe haven currencies like the “Japanese yen, Swiss franc, and US dollar (USD) tend to appreciate against… emerging market currencies”, in the words of the IMF (International Monetary Fund).  And, when the USD is on the rise, “capital tends to flow from emerging markets to the United States, and emerging market currencies depreciate”, explains the ECB.

Summing Up

Interest rate differentials are positioned to further depress CEE currencies, but these are not the only things that determine exchange rates: market volatility and risk appetite do too. Unfortunately, both of these factors look set to add to the downward pressure in months ahead, given the situation in Israel.  

Other factors that could potentially dampen CEE currencies include weak growth in China and a potential stagflation scenario in Europe. Piotr Matys of InTouch Capital Markets points out one thing that could reverse the flow of some capital back in the direction of emerging markets: If the Fed were to give a clear signal they will cut rates early next year.

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