FOREX: Dollar slips on hopes of US-Iran deal; yen rises amid intervention buzz

The dollar slipped across the board on Wednesday as investors grew optimistic about a possible end to the Iran war, while a sudden jump in the Japanese yen to a more than two-month high put traders on alert for another round of official buying from Tokyo.

A source from mediator Pakistan who is familiar with the negotiations said Washington and Tehran were closing in on an agreement on a one-page memorandum to end the conflict.

The Pakistani source said a report earlier by U.S. outlet Axios on the proposed memorandum was accurate. The Axios report had cited two U.S. officials and two other sources familiar with the discussions.

"The more positive risk tone is really pressuring the dollar as folk buy into the optimism surrounding a potential U.S.-Iran deal," said Michael Brown, senior research strategist at Pepperstone in London.

"Obviously there could still be a long way to go on that front, but today’s headlines support the idea that the direction of travel remains towards de-escalation," he said.

"In any case, participants are desperate to latch on to good news, so it’s a bit of a ‘buy risk first, ask questions later’ mindset creeping in," said Brown.

The dollar index =USD, which measures the U.S. currency against six peers, was 0.3% lower at 97.993, after slipping to 97.623, its lowest since before the late February U.S. strikes on Iran that started the conflict.

The euro was 0.5% higher at $1.17535, while sterling GBP= was 0.4% higher at $1.35955.

U.S. private payrolls increased more than expected in April, the ADP's national employment report showed on Wednesday.

The markets are now gearing up for the U.S. non-farm payrolls release later this week, which will serve as a test of whether the economy remains resilient enough to keep the Federal Reserve's monetary policy on hold, or whether a softening labour market could revive the case for interest rate cuts.

"In our view, USD downside is limited because recent U.S. economic data are likely to keep odds of Fed funds rate hikes in play," Elias Haddad, global head of markets ⁠strategy in the ​forex team at Brown Brothers Harriman, said in a note.

The rebound in risk appetite helped the Australian dollar extend gains to hit its strongest level in four years, rising 0.8% on the day to $0.72405 AUD=D3. The move follows the Reserve Bank of Australia's decision the previous day to raise rates for the third time this year.

Leading cryptocurrency bitcoin BTC= slipped 0.5% to $81,240, after scaling a more than three month high of $82,793 earlier in the session.

YEN WATCH

Against the yen, the dollar was 1% lower at 156.385 yen, after slipping as low as 155, around its weakest since February 24. The move triggered speculation of another round of intervention.

Japanese Finance Minister Satsuki Katayama earlier in the week warned against speculative moves in foreign exchange, after a brief jolt higher in the yen sparked speculation Tokyo had again intervened to support the currency.

"As I have said repeatedly, we will take decisive measures against speculative moves, in accordance with the statement signed between Japan and the United States last year," Katayama told reporters after the Asian Development Bank's annual meeting in Uzbekistan.

The Ministry of Finance of Japan could not be reached immediately for comment during a local holiday.

"Although they’ve not commented officially I think we have to assume that the MoF stepped in again," Pepperstone's Brown said.

"You don’t get a huge move like that, with no obvious catalyst, unless there’s a ‘silent hand’ involved," he said.

-Saqib Iqbal Ahmed/Reuters