FOREX: Dollar steady as traders weigh escalating Iran war against ceasefire hopes

The U.S. dollar was steady on Monday, while the yen flirted with the crucial 160 per dollar level, as investors took stock of the escalating Iran war, with all eyes on the latest deadline from U.S. President Donald Trump to reopen the Strait of Hormuz.

In an expletive-laden Easter Sunday social media post, Trump threatened to target Iran's power plants and bridges on Tuesday if the strategic waterway is not reopened, setting a precise deadline of 8 p.m. Eastern Time (0000 GMT Wednesday).

However, investors were also left weighing the possibility of a ceasefire after a media report suggested a last-ditch push from negotiators was underway.

"Every new ultimatum makes the disruption look longer, stickier and more macro-negative," said Charu Chanana, chief investment strategist at Saxo in Singapore.

The euro EUR= was at $1.1542, while sterling GBP= last fetched $1.324. The dollar index =USD, which measures the U.S. currency against six others, was last at 100. With many Asian and European markets closed on Monday, liquidity was thin.

The Australian dollar AUD= was 0.49% higher at $0.692, wobbling near last week's two-month low.

Global markets have been rattled since the U.S.-Israeli war against Iran broke out at the end of February, with Tehran effectively closing the Strait of Hormuz, through which about a fifth of the world's total oil and liquefied natural gas passes.

"If the U.S. escalates, expect global markets to reprice sharply," said Prashant Newnaha, senior rates strategist at TD Securities.

The Hormuz closure has pushed oil prices well above $100 per barrel, stoking fears of high inflation and upending the outlook for interest rates across the world. Worries about the hit to economic growth have also weighed as stagflation risks swirl.

Traders are now no longer pricing a rate cut from the Federal Reserve until well into the second half of 2027, compared with expectations of two reductions in 2026 at the start of the year.

YEN WATCH

The Japanese yen JPY= was down at 159.71 per U.S. dollar, not far from the 21-month low hit last week as traders watch for indications of Tokyo intervening in the wake of strong warnings from officials in the past few days.

Japanese Finance Minister Satsuki Katayama on Friday put currency traders on notice, saying the government stands ready to act against speculative moves in foreign exchange markets as volatility has risen "significantly."

Still, many doubt the firepower of any intervention at a time when geopolitical turmoil in the Middle East is fueling relentless demand for the safe-haven dollar. The yen is down 1.5% since the war started, stuck close to the 160 level.

"The conditions for material intervention to support the yen by Japanese officials do not appear present and the market does not appear to have given up on fishing for the official pain threshold," said Marc Chandler, chief market strategist at Bannockburn Global Forex, in a research note.

Speculators have also been adding to their short yen positioning, with the latest weekly data showing a short position worth $5.7 billion, the highest since July 2024, when Japan last intervened in the FX markets.

-Hannah Lang/Reuters