SINGAPORE, Oct 16 (Reuters) - The dollar came off highs in Asian trade on Monday, but held at elevated levels as Middle East tensions escalated, and investors awaited clues to the outlook for U.S. interest rates from a speech by Federal Reserve Chair Jerome Powell later this week.
The dollar stayed near a one-week high against the euro and sterling as risk sentiment remained fragile.
The euro was last 0.13% higher at $1.05265, having slid to a one-week low of $1.0496 on Friday.
Sterling gained 0.13% to $1.2160, steadying from Friday's one-week low of $1.2123.
The dollar index fell 0.07% to 106.49.
"I view what's going on in Israel as a regional conflict, which typically does not have meaningful impacts on financial markets over time," said David Chao, Invesco's global market strategist for Asia Pacific ex-Japan.
"I don't see it altering growth trajectories of the major economies nor does it make the Fed more hawkish. If anything, I think the Fed is less inclined to tighten going forward given the perception of heightened risks."
Elsewhere, the Israeli shekel slid to a more than an eight-year low of 3.99 per dollar, after the country's Prime Minister Benjamin Netanyahu vowed on Sunday to "demolish Hamas" as his troops prepared to move into the Gaza Strip.
The shekel has fallen more than 3% against the dollar since gunmen from the Palestinian group Hamas rampaged through Israeli towns on Oct. 7.
The yen was last 0.1% stronger at 149.39 per dollar, edging away from the sensitive 150-level. Some traders expect an increased potential for Japanese authorities to intervene to suppot the yen if it weakens past that level.
Carry trades funded by the yen could be the biggest casualty of further escalation in the war, analysts said, as global investors who have for months been shorting the yen to invest in higher-yielding currencies buy it back as a safe-haven.
"Obviously war is inflationary, disrupts growth and threatens risk assets," said James Malcolm, head of FX strategy at UBS in London.
"The largest overhang I can see in this regard is dollar-yen, where the BOJ must pivot regardless and the carry trade that has built up now amounts to nearly half a trillion dollars."
The BOJ has continued to maintain its ultra-easy policy settings although markets are rife with speculation that it could move to gradually exit from the accommodative stance sooner rather than later.
If the BOJ does start its exit, the yen's yield gap against the dollar could narrow, but that depends on what the Fed decides on U.S. rates.
Traders were keenly awaiting Powell's speech before the Economic Club of New York later this week for clues on how much further U.S. interest rates could rise, after data last week showed consumer prices increased more than expected in September.
Markets are largely expecting the Fed to keep rates on hold when it announces its next monetary policy decision in November, according to the CME FedWatch tool, though they see a roughly 32% chance the central bank could deliver a rate hike in December.
In other currencies, the Australian dollar, often used as a proxy for risk appetite, gained 0.45% to $0.63255, after sliding 1.4% last week.
The New Zealand dollar rose 0.65% to $0.5923.
New Zealand's centre-right National Party led by Christopher Luxon will form a new government with its preferred coalition party ACT, as Prime Minister Chris Hipkins conceded his Labour Party could not form a government after Saturday's general election.
"The kiwi dollar jumped... following a clear and decisive victory of New Zealand's opposition National Party," said Kyle Rodda, senior financial market analyst at Capital.com.
"It appears the Nationals are in the position to win power while only requiring one coalition partner, excluding the populist New Zealand First party.
"The kiwi has jumped on the prospect such dysfunction has been avoided."
(Reporting by Rae Wee and Vidya Ranganathan Editing by Shri Navaratnam and Simon Cameron-Moore)
