FOREX: US dollar remains stable, Japanese yen nears 40-year low amid Iran conflict

TOKYO - The dollar largely stabilised on Thursday as renewed U.S.-Iran tensions kept investors on edge and underpinned demand for the safe-haven currency, while the yen languished near a 40-year low with little sign of a turnaround.

The dollar index =USD, which measures the greenback against a basket of currencies including the yen and the euro, was flat at 101.11. The greenback has gained as the worsening flare-up between Washington and Tehran triggered a rebound in oil prices and fanned inflation fears.

Oil prices rose, with Brent crude futures LCOc1 up by more than 1.3% to $95.31 a barrel on Thursday after the U.S. military said it launched a new round of strikes on Iran and the Iranian-aligned Houthis claimed military strikes on two Saudi oil tankers as part of a naval blockade on Saudi Arabia, raising the risk of further disruption to Red Sea oil flows. O/R

Two-year U.S. Treasury yields climbed to a 17-month high on Wednesday as rising oil prices stoked inflation concerns which could increase the odds of Federal Reserve interest rate hikes. US/

"What is different from the start of the conflict five months ago is inventories. Lower inventories mean shortages of oil and gas are more likely the longer the conflict continues, exacerbating the negative economic impact of high energy prices which favours the USD," said Joseph Capurso, head of international economics and foreign exchange at Commonwealth Bank of Australia, in a note.

The euro EUR= was up 0.02% at $1.1412. The European Central Bank will hold a meeting later on Thursday. It is all but certain to keep ​interest rates unchanged but will hold the door wide open to another rate hike in September, as a fresh jump in energy ‌prices threatens to put more upward pressure on inflation.

The Australian dollar AUD= dipped 0.1% versus the greenback to $0.6989 while New Zealand's kiwi softened almost 0.1% to $0.5811. British sterling last traded at $1.3373.

YEN SHOWS LITTLE SIGN OF RECOVERY

The Japanese yen edged 0.02% higher against the greenback to 163.1 per dollar, surrendering gains after Bloomberg News reported on Wednesday that Bank of Japan officials were open to raising rates at a faster pace than the consensus among economists.

Reuters reported that the BOJ remains on alert to upside inflation risks that could lead to faster interest rate hikes than markets project, according to three sources familiar with its thinking.

The currency weakened to 163.23 on Tuesday, its lowest level since December 1986, as investors adjusted to a shifting policy backdrop under Japanese Prime Minister Sanae Takaichi, whose administration has struggled to dispel expectations that it could pressure the BOJ to delay further rate hikes.

Japan's finance minister has repeatedly issued verbal warnings about possible intervention in the currency market, and Tokyo carried out yen-buying operations in April and May.

But the yen's broader trajectory has remained unchanged, with analysts attributing its weakness to broad-based dollar strength and the BOJ's still-low interest rates.

"Against the backdrop of rising energy prices and mounting expectations of a more hawkish Fed meeting next week, it appears very unlikely — despite continued threats — that Japanese authorities will intervene until after next week’s FOMC meeting," Tony Sycamore, market analyst at IG Australia, said in a note.

-Reporting by Satoshi Sugiyama; Editing by Kim Coghill/Reuters