FOREX: Dollar hits one-week high as Middle East tensions reignite

SINGAPORE/TOKYO - The U.S. dollar strengthened to a one-week high against major currencies on Monday as renewed U.S.-Iran tensions and uncertain prospects for a peace agreement in the Middle East drove investors toward safe-haven assets.

The United States said on Sunday that it had seized an Iranian cargo vessel that allegedly attempted to breach a blockade, prompting Iran to threaten retaliation amid rising concerns of a possible escalation in hostilities.

Tehran also announced it would not take part in a second round of negotiations that Washington had hoped to begin before a two-week ceasefire window with Iran expires on Tuesday.

“The weekend escalation revives the geopolitical risk premium just as markets had started pricing in a peace dividend,” said Charu Chanana, chief investment strategist at Saxo. She added that higher oil prices are “not just an energy story, but a growth and rates story.”

In currency markets, the euro fell 0.14% to $1.1746, while sterling declined 0.29% to $1.3479. The Australian dollar, often sensitive to global risk sentiment, slipped 0.3% to $0.7145 in early trading.

The dollar index, which tracks the U.S. currency against six major peers, was steady at 98.38, hovering near its highest level in a week and recovering part of its recent losses.

Despite the latest gains, the index remains down 1.5% in April as improving risk appetite earlier in the month supported expectations for a potential peace breakthrough. In contrast, it had climbed 2.3% in March on strong safe-haven demand following the outbreak of conflict.

Analysts at Barclays noted that sentiment indicators still show a preference for the dollar among investors, suggesting room for further downside if tensions in the Middle East ease.

“Any market wobble would likely have less room to extend and may even present an opportunity to re-establish short-dollar positions,” the bank said in a note. “The question is whether this volatility is worth trading given the level of uncertainty.”

Now in its eighth week, the conflict has triggered significant disruption to global energy supplies, pushing oil prices higher amid the effective closure of the Strait of Hormuz, through which roughly one-fifth of the world’s oil flows.

The United States has maintained a blockade of Iranian ports, while Iran has alternately imposed and lifted restrictions on maritime traffic through the strategic waterway.

Oil prices extended gains on Monday. Brent crude futures rose 7% to $96.80 per barrel, while U.S. West Texas Intermediate climbed more than 8% to $90.74 per barrel.

“The Strait of Hormuz remains the key focus for markets, and hopes of renewed U.S.-Iran talks before the ceasefire ends now appear increasingly remote,” said Nick Twidale, chief market strategist at ATFX Global in Sydney. “For now, we are likely to see further downside pressure on risk assets in the coming sessions.”

The New Zealand dollar edged slightly lower to $0.5876.

In Asia, the Japanese yen weakened to 159.06 per dollar, nearing the closely watched 160 level that traders believe could trigger intervention to support the currency.

Investors are also turning attention to the Bank of Japan’s upcoming policy meeting later this month. Governor Kazuo Ueda has avoided committing to a near-term rate hike, though recent comments following IMF meetings suggested a more hawkish stance and potential tightening by June.

In cryptocurrencies, bitcoin slipped 0.56% to $74,229.65, while ether declined 0.2% to $2,276.04. -Reporting by Gregor Stuart Hunter and Ankur Banerjee; Editing by Lisa Shumaker and Kevin Buckland/Reuters