FOREX: Dollar firms as US-Iran hostilities flare, yen steadied by intervention risk

The dollar started Friday's Asian session on a firm footing against most major currencies after renewed hostilities broke out between the U.S. and Iran, while the Japanese yen held largely steady following fresh verbal jawboning from Tokyo.

The U.S. and Iran exchanged fire and traded barbs again on Thursday, piling fresh pressure on a fragile month-long ceasefire as Iran reviews Washington's proposal to end the war.

Oil prices jumped, with U.S. crude futures CLc1 rising as much as 3% in early trading, adding to the risk-off mood in currency markets.

The dollar index =USD measured against key peers was a touch firmer at 98.235. The rising tensions lifted the greenback for a second day from an over two-month low struck early in the week on hopes of a peace deal, putting it on track to finish the week largely flat.

"The path towards a lasting agreement is anything but linear," wrote Chris Weston, head of research at Pepperstone.

"Traders have had to rethink the assumptions on the trajectory of the conflict and the normalization of vessel flows through Hormuz that had been made over the last couple of sessions."

Markets are also bracing for the U.S. non-farm payrolls report later on Friday, and it may take an outlier number, particularly a sufficiently weak one, to really move the dial on dollar volatility, he added.

Sterling traded at $1.3555 GBP=D3, headed for its first weekly loss since March, as investors awaited local election results that could heap further political pressure on Prime Minister Keir Starmer.

The euro was steady at $1.1727 EUR=, poised to end the week a touch firmer.

The Australian dollar fetched $0.72059 AUD=D3, and the New Zealand kiwi changed hands at $0.59365 NZD=D3, both on track to post a winning week on improved risk appetite in earlier days.

Traders remained focussed on the Japanese yen after recent interventions and verbal warnings from Tokyo kept sharp selling at bay. The yen JPY= was largely steady at 156.995 in early Asian deals and is set to end the week on a steady footing.

Japan faces no constraints on how often it can intervene in currency markets and is in daily contact with U.S. authorities, its top currency diplomat said on Thursday, reinforcing Tokyo's resolve to defend the embattled yen.

"Against the current backdrop of elevated energy prices and rising yields, Japanese intervention can only act as a safety harness on the yen's descent, but it can't pull it to safety," said Tony Sycamore, market analyst at IG.

Until macro and technical conditions change, the yen is likely to keep testing the Bank of Japan's resolve, he added.

-Jiaxing Li/Reuters