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. Last Updated: 07/27/2016

U.S. Strikes on Iraq Briefly Jolt Market

LONDON -- Investors responded to U.S. missile strikes on Iraq by driving oil prices to their highest levels since the Gulf War and sending shivers through stock markets Tuesday.

The U.S. punishment for weekend incursions by Iraqi troops into Kurdish areas also came to the aid of gold and the dollar, often seen as safe financial havens at times of crisis.

But by the end of European trading, much of the market impact had faded and oil prices showed only small gains after investors cashed in some profits in the absence of an escalation of the confrontation.

Traders said there seemed to be no threat to Middle East oil supplies apart from the loss of expected Iraqi sales under a UN exchange deal for food and medicines.

"The fear is that Middle Eastern supplies might be disrupted [but] oil supply is not at significant risk at present," said brokerage Gerald and National Inter Commodities.

"It's the normal ebb and flow of an overnight story ... it's very choppy," one oil broker said.

International benchmark Brent crude hit a post-Gulf War high of $23.50 a barrel in Asian trading but traded no higher than $22.85 for October futures on London's International Petroleum Exchange.

By late afternoon in London the price had slipped back to show a gain of just five cents to $22.04. It jumped $1.21 on Monday after the United Nations delayed implementation of an Iraqi oil-for-food deal which allowed Baghdad $2 billion of oil sales renewable every six months.

In the next few weeks, traders had been expecting Iraq's first oil sales for six years since the Gulf War to hit markets that were already around $4 higher than last year.

But oil analysts and traders said Iraq's latest military adventure had probably derailed plans for the resumption of Iraqi oil exports beyond the end of the year.

"Poor Saddam is helping to improve the income of his Gulf War enemies Saudi Arabia and Kuwait. OPEC should be very pleased with his work," a senior official of the Organization of the Petroleum Exporting Countries said.

For financial markets, the focus of attention soon switched to fears of higher U.S. interest rates after initial interest in the confrontation with Iraq. "For the dollar to gain more support from this, the whole thing would have to spill over outside Iraq and it doesn't seem that [President Bill] Clinton would want to do anything that will blow up in his face," said Julian Jessop, chief European economist at Nikko Europe.

The dollar ended European trading around 109.25 yen and 1.4835 marks, below earlier highs of 109.45 and 1.4912.

Gold prices gained around 60 cents an ounce to $387.50 in early European trade but then turned round to show little net change on the day.

Bullion traders remembered losing a lot of money during the 1990 Gulf War when gold prices soared and then collapsed.

The Dow Jones industrial average of U.S. blue-chip stocks lost more than 50 points within 10 minutes of Wall Street's opening, the first time the key New York share market had traded this week and could react to the Iraqi situation.

"I think Saddam Hussein is testing us," said one New York trader as stocks dropped.

But toward the end of the New York morning, losses on Wall Street were only a quarter of their earlier levels. Leading European bourses also closed above their lows.

Oil shares were among the few stock market beneficiaries from the increased Middle East tensions and higher oil prices, while stocks such as British Airways and airport operator BAA took hits, with jet fuel prices around five-year highs.