FOREX: Dollar firms on Middle East war fears; yen steady

The U.S. dollar firmed on Tuesday as the resumption of hostilities in the Middle East war spurred safe-haven demand, while the yen steadied in muted trade after suspected intervention by Tokyo last week sparked sharp gains.

The Australian dollar AUD= drifted lower after the central bank raised rates, as expected, for the third straight meeting to tame inflation. It last bought $0.71535, 0.19% lower on the day as the spotlight remains on the Iran war.

Investors will be monitoring the RBA's tone and comments to gauge the rate outlook after the central bank sharply raised its inflation forecasts, while downgrading the outlook for economic growth and employment due to the global energy shock.

"The RBA delivered a hawkish hike, though it still leaves in balance whether we'll see one or two more hikes by December," said Matt Simpson, a senior market analyst at StoneX.

Inflation has been above the RBA's 2%-3% target range since mid-2025, prompting the central bank to start raising rates from early February.

Inflation fears have flared worldwide after the closure of the Strait of Hormuz - a vital artery for about a fifth of global oil flows - unleashed an energy shock that has kept crude prices largely above $100 a barrel since the war erupted in late February.

Fresh U.S. and Iranian strikes in the Gulf on Monday rattled markets, severely testing a fragile truce and keeping investors edgy and risk appetite subdued.

That lifted the dollar, with the euro EUR= holding onto its overnight losses. It last fetched $1.1684, while sterling GBP= was at $1.353. The dollar index =USD, which measures the U.S. currency against six units, was steady at 98.523 after rising 0.3% on Monday.

"While we have seen a clear shift toward risk aversion, we are yet to see the kind of outsized moves that would likely accompany a full escalation in hostilities," said Nick Twidale, chief market strategist at ATFX Global in Sydney.

Twidale said the situation remains highly fluid and further escalation could push oil prices sharply higher and weigh on risk assets. Brent futures LCOc1 were at $112.92 per barrel, down more than 1% after jumping 6% on Monday. O/R

TRADERS KEEP YEN VIGIL

The yen JPY= bought 157.27 per U.S. dollar, not far from its strongest level in two months after several bouts of sharp gains since Thursday, when sources told Reuters authorities had stepped into the currency market to arrest a steep selloff.

Data last week pointed to roughly $35 billion in spending by Tokyo to boost the yen, although analysts think it is unlikely to help the battered currency in the long term.

The yen has languished for years, weighed down by Japan's ultra-low rates and a widening gulf with higher-yielding developed markets, compounded by mounting fiscal unease. The war-driven energy shock has piled on the pressure.

Deepali Bhargava, regional head of research for Asia-Pacific at ING, said the suspected intervention has merely recalibrated the near‑term dollar-yen trading range and does little to change the underlying short‑yen, carry‑driven pressures.

A brief spike in the yen on Monday sparked speculation that Japan had once again intervened, especially after officials warned last week of such moves during the Golden Week holidays.

Charu Chanana, chief investment strategist at Saxo, said markets are keenly aware that the 160 level is politically sensitive, meaning even modest moves in thin Asian trade can trigger outsized short-covering.

"Near term, USDJPY may stay volatile in a wider 155–160 range, with authorities likely leaning against a clean break above 160 rather than engineering a durable yen reversal."

The yen's fate is also tied to oil prices and how quickly the war in the Middle East is resolved.

"A lot hinges on oil price," said Vasu Menon, managing director of investment strategy at OCBC. "If it rises or remains elevated, then the yen could come under pressure once again."

-Ankur Banerjee/Reuters