FOREX: Dollar set for weekly gain on stalled US-Iran talks and Middle East uncertainty

The dollar was on track for its first weekly gain in three weeks on Friday, as stalled peace negotiations between the U.S. and Iran dampened hopes for an immediate easing of Middle East tensions.

While Lebanon and Israel extended their ceasefire for three weeks ahead of its expiration on Sunday, Iran showed off its control over the Strait of Hormuz by releasing footage of its commandos storming a huge cargo ship, leaving the timing of the reopening of the world's most important shipping corridor uncertain and keeping oil prices elevated.

The dollar index =USD, which measures the greenback against a basket of currencies including the yen and the euro, was little moved at 98.82 and remained on track for a weekly gain of 0.58%. The euro EUR=was flat at $1.1683, while sterling GBP= edged down 0.02% to $1.3464.

"Oil and the dollar are still moving pretty closely together, and with crude creeping back up ... I'd say the dollar is still staying fairly firm," said Sho Suzuki, a market analyst at Matsui Securities.

Brent crude futures <LCOc1> rose $1.23, or 1.17%, to $106.30 a barrel at 0107 GMT, while West Texas Intermediate futures <CLc1> were up $1.07, or 1.12%, at $96.92.

The dollar has drawn safe-haven demand amid the uncertainty. It gained ground in March as concerns over the conflict deepened, but gave back some of those gains this month as optimism over a potential resolution grew.

Meanwhile, the yen JPY= was on track for a fifth straight day of losses against the dollar, weakening 0.03% to 159.77 per dollar.

Japanese Finance Minister Satsuki Katayama reiterated her verbal warning on intervention on Friday that authorities can take "decisive" action against speculative moves in the foreign exchange market, a day after saying Japan has a "free hand" to intervene and that past interventions had been effective.

With Japanese authorities continuing to push back against yen weakness, "it is difficult to expect a scenario in which the yen weakens sharply beyond 160 per dollar in the near term," said Akihiko Yokoo, senior analyst at Mitsubishi UFJ Bank, said in a note.

Japan's core consumer inflation slowed below the central bank's 2% target for a second straight month in March. Analysts, though, expect inflation to accelerate back above the Bank of Japan's target in coming months, as companies begin to pass on higher fuel costs from the Middle East conflict.

The BOJ is set to hold its two-day policy meeting ending on Tuesday. Reuters reported the bank is likely to hold off raising ​interest rates next week as fading prospects of a near-term end to the Middle East war keep the ‌country's economic and price outlook highly uncertain. The BOJ is still expected to signal its readiness to hike to counter mounting price pressures.

Matsui Securities' Suzuki said an intervention is more likely only if the dollar-yen pair breaks above its April 2024 high of 161.95.

"So even if yen weakness accelerates after next week's BOJ meeting, they'd probably start with jawboning and if that doesn't work, then move to actual intervention," he said.

In a similar vein, the European Central Bank will hold its deposit rate on April 30 but hike it in June, according to just over half of economists polled by Reuters, in a bid to protect a war-induced energy shock from knocking the euro zone economy off balance.

The Australian dollar AUD= strengthened 0.04% versus the greenback to $0.7131. New Zealand's kiwi NZD= strengthened 0.07% versus the greenback to $0.5856. The dollar also held firm against emerging Asian currencies, with the Philippine peso PHP= falling 0.29% to 60.70 per dollar, the Malaysian ringgit weakening 0.17% to 3.97 and the Indian rupee slipping 0.07% to 94.11.

In cryptocurrencies, bitcoin BTC= gained 0.64% to $78,420.18. Ethereum ETH= rose 0.16% to $2,330.16.

-Satoshi Sugiyama/Reuters