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Investors wait for Iran response as Trump claims military

success

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Higher oil prices could boost inflation, sap consumer

confidence

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US dollar could see near-term strength from safe-haven

demand

(Adds Middle East and cryptocurrency market reaction in

paragraphs 2, 9-11, fresh comments)

By Suzanne McGee, Saqib Iqbal Ahmed and Lewis Krauskopf

NEW YORK, June 21 (Reuters) - A U.S. attack on Iranian

nuclear sites could push oil prices even higher and trigger a

knee-jerk rush to safety, investors said, as they assessed how

the latest escalation of tensions would ripple through the

global economy.

The reaction in Middle East stock markets, which trade on

Sunday, suggested investors were assuming a benign scenario,

even as Iran intensified its missile attacks on Israel in

response to the sudden, deep U.S. involvement in the conflict.

Trump called the attack "a spectacular military success" in

a televised address to the nation and said Iran's "key nuclear

enrichment facilities have been completely and totally

obliterated". He said the U.S. military could go after other

targets in Iran if the country did not agree to peace.

Iran said it reserves all options to defend itself, and

warned of "everlasting consequences".

Investors said they expected the U.S. involvement would

cause a selloff in stock markets and a possible bid for the

dollar and other safe-haven assets when major markets reopen,

but also said much uncertainty about the course of the conflict

remained.

"I think the markets are going to be initially alarmed, and

I think oil will open higher," said Mark Spindel, chief

investment officer at Potomac River Capital.

"We don't have any damage assessment and that will take some

time. Even though he has described this as 'done', we're

engaged. What comes next?" Spindel said.

"I think the uncertainty is going to blanket the markets, as

now Americans everywhere are going to be exposed. It's going to

raise uncertainty and volatility, particularly in oil," he

added.

One indicator of how markets will react in the coming week

was the price of ether, the second-largest cryptocurrency and

the new gauge of retail investor sentiment after bitcoin,

which is now held largely by institutions.

Ether was down 5% on Sunday, taking losses since the

first Israeli strikes on Iran on June 13 to 13%.

Most Gulf stock markets, however, seemed unconcerned by the

early morning attacks, with the main indexes in Qatar,

Saudi Arabia and Kuwait up slightly and Israel's

Tel Aviv main index at an all-time high.

OIL PRICES, INFLATION

A key concern for markets would center around the potential

impact of the developments in the Middle East on oil prices and

thus on inflation. A rise in inflation could dampen consumer

confidence and lessen the chance of near-term interest rate

cuts.

Saul Kavonic, a senior energy analyst at equity research

firm MST Marquee in Sydney, said the more likely scenario would

see Iran respond by targeting American interests in the Middle

East, including Gulf oil infrastructure in places such as Iraq

or harassing ship passages through the Strait of Hormuz.

The Strait of Hormuz lies between Oman and Iran and is the

primary export route for oil producers such as Saudi Arabia, the

United Arab Emirates, Iraq and Kuwait.

"Much depends on how Iran responds in the coming hours

and days, but this could set us on a path towards $100 oil if

Iran respond as they have previously threatened to," Kavonic

said.

While global benchmark Brent crude futures have

risen as much as 18% since June 10, hitting a near five-month

high of $79.04 on Thursday, the S&P 500 has been little

changed, following an initial drop when Israel launched its

attacks on Iran on June 13.

In comments after Trump announced the strikes, Jamie

Cox, managing partner at Harris Financial Group, agreed oil

prices would likely spike on the initial news. But Cox said he

expected prices to likely level off in a few days as the attacks

could lead Iran to seek a peace deal with Israel and the United

States.

"With this demonstration of force and total annihilation of

its nuclear capabilities, they've lost all of their leverage and

will likely hit the escape button to a peace deal," Cox said.

Economists warn that a dramatic rise in oil prices could

damage a global economy already strained by Trump's tariffs.

Still, any pullback in equities might be fleeting, history

suggests. During past prominent instances of Middle East

tensions coming to a boil, including the 2003 Iraq invasion and

the 2019 attacks on Saudi oil facilities, stocks initially

languished but soon recovered to trade higher in the months

ahead.

On average, the S&P 500 slipped 0.3% in the three weeks

following the start of conflict, but was 2.3% higher on average

two months following the conflict, according to data from

Wedbush Securities and CapIQ Pro.

DOLLAR WOES

An escalation in the conflict could have mixed implications

for the U.S. dollar, which has tumbled this year amid worries

over diminished U.S. exceptionalism.

In the event of U.S. direct engagement in the Iran-Israel

war, the dollar could initially benefit from a safety bid,

analysts said.

"Do we see a flight to safety? That would signal yields

going lower and the dollar getting stronger," said Steve

Sosnick, chief market strategist at IBKR in Greenwich,

Connecticut. "It's hard to imagine stocks not reacting

negatively and the question is how much. It will depend on

Iranian reaction and whether oil prices spike."