FOREX: Dollar drops on Iran war de-escalation hopes

The dollar fell on Tuesday on hopes that the U.S.-Israel war with Iran may not last as long as some feared, though it remained on track for its best quarter since the fourth quarter of 2024, supported by safe-haven demand due to lingering uncertainty over the conflict's duration.

The dollar index =USD, which measures the greenback against a basket of currencies including the yen and the euro, was last down 0.59% at 99.96. It is on track for a 2.35% monthly gain, best since July, and a 1.7% return for the first quarter.

The greenback has benefited from a safe-haven bid since the conflict began in late February, and as a net energy exporter, the U.S. is also relatively better positioned to handle oil disruptions than other nations.

U.S. President Donald Trump told aides he is willing to end the military campaign against Iran even if the crucial Strait of Hormuz shipping artery remains largely closed with unclear plans to get it reopened at a later date, the Wall Street Journal reported on Monday, citing administration officials.

However, other signs pointed to escalation in the conflict. U.S. Defense Secretary Pete Hegseth said on Tuesday that the next few days in the war against Iran would be decisive and warned Tehran that the conflict would intensify if it did not make a deal.

“It's difficult to keep track of who's saying what and exactly what the implications of some of these comments are,” said Shaun Osborne, chief FX strategist at Scotiabank.

Iran's Revolutionary Guards responded with a new threat, saying that they will target U.S. companies in the region in retaliation for attacks on Iran from Wednesday, listing 18 entities including Microsoft, Google, Apple, Intel, IBM, Tesla and Boeing.

“Markets are concerned that it might go on for longer, that the conflict could broaden, and the aftershocks could be significant and long-lasting. There's still a lot of uncertainty here about where we actually land on this,” Osborne said.

He said the dollar is overvalued, but expects it to remain supported as long as war concerns weigh on risk appetite and the equity market's VIX - an index of volatility - stays elevated.

China and Pakistan on Tuesday called for an immediate ceasefire in the Gulf and the wider Middle East, urging the swift launch of peace talks and the restoration of normal navigation in the strait, as their foreign ministers met in Beijing.

TRADERS GEAR UP FOR JOBS DATA

Trading on Tuesday was also likely influenced by investors repositioning for month- and quarter-end.

U.S. job openings fell more than expected in February and hiring dropped to the lowest level in nearly six years, government data showed on Tuesday.

This week's main U.S. economic focus will be Friday's jobs report for March. It is expected to show that employers added 60,000 jobs during the month, according to the median estimate of economists polled by Reuters, following an unexpected loss of 92,000 jobs in February.

A sharp deterioration in the labor market would likely revive expectations for Fed rate cuts this year, which have been largely priced out as rising oil prices from the Iran war stoke inflation concerns.

The euro EUR= gained 0.68% to $1.1543. It is set for a 2.25% monthly decline, the worst since July and a 1.7% quarterly loss, the worst since Q3 2024.

The pound GBP= strengthened 0.33% to $1.3228. It is on track for a 1.9% monthly loss, the worst since October, and 1.8% quarterly drop.

The Japanese yen JPY= rose 0.55% against the greenback to 158.84 per dollar.

The dollar is on pace for a 1.8% monthly gain against the Japanese currency and a 1.4% quarterly increase.

The yen rebounded for a second day after Japanese officials stepped up threats to intervene in the currency to stem recent weakness, with Finance Minister Satsuki Katayama on Tuesday repeating Tokyo's readiness to respond "on all fronts" against volatile moves.

Katayama also labelled recent yen falls as speculative for the first time since the Middle East war began, shifting focus back to currency short-sellers as policymakers braced for a triple market selloff driven by fresh inflationary concerns.

In cryptocurrencies, bitcoin BTC= gained 1.75% to $67,757.

-Karen Brettell, Tom Westbrook and Alun John/Reuters