(Bloomberg) -- Israel’s currency rebounded after a bout of selling as investors bet the conflict between Iran and Israel won’t escalate further.

The shekel advanced more than 1% against dollar on Monday, the best performer among 23 major currencies tracked by Bloomberg

Global markets calmed as traders speculated that diplomatic efforts will help prevent the conflict from intensifying following Iran’s unprecedented attack on Israel over the weekend. Iran said “the matter can be deemed concluded,” and President Joe Biden reportedly told Israeli Prime Minister Benjamin Netanyahu that the US won’t support an Israeli counterattack.

“Markets are probably hoping Israel will take the ‘win’ insofar as them having defended themselves successfully,” said Henrik Gullberg macro strategist at Coex Partners Ltd. in London. Any indication of a forceful Israeli response would be positive for the dollar, including against the shekel, he said.

Still, swap markets are now pricing fewer rate cuts this year by the Bank of Israel and no further easing in 2025. Traders are now expecting that the central bank will keep the key policy rate above 4% throughout next year, from the current 4.5%. 

Earlier this month, traders were pricing a key policy rate of around 3.3% in 2025.

“The heightened probability of tail events stemming from recent developments is expected to reinforce the cautious stance of the central bank, prompting the central bank to refrain from premature action in light of the escalating geopolitical risks,” Deutsche Bank strategists including Oliver Harvey wrote in note. 

Budget dynamics, potential rating downgrades due to prolonged tensions in the region, risks to financial asset prices and the resulting uncertainty regarding the inflation outlook may necessitate a more hawkish monetary policy stance, they said.

The benchmark stock index jumped as much as 1.6% before erasing some of the gains while Israeli dollar bonds were mixed. The 2026 note posted the biggest gain on the Bloomberg EM Sovereign Total Return Index.

--With assistance from Joanna Ossinger and Srinivasan Sivabalan.

(Updates with latest market move in second paragraph)

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