Dollar on defensive as markets hope for best on Middle East

By Alun John

LONDON, May 7 (Reuters) – The dollar stayed on the defensive on Thursday as hopes for a de-escalation in the Iran-U.S. war supported oil-exposed currencies, while Tokyo resumed its verbal intervention in support of the yen, making speculators cautious.

President Donald Trump predicted a swift end to the war as Tehran considered a U.S. peace proposal that Reuters reported would formally end the conflict, while leaving unresolved key U.S. demands that Iran suspend its nuclear programme and reopen the Strait of Hormuz.

But moves were much more muted on Thursday compared to Wednesday, when the latest proposals were reported.

The euro was up 0.1% on the day at $1.1763 after gaining 0.47% on Wednesday, while sterling was 0.16% higher at $1.3615 after rallying 0.4% the previous day.

“Everyone is still very focused on the Middle East and where we are on the negotiations but really we just don’t know, and markets are reflecting that the easiest thing is to wait and see what happens,” said Nick Rees, head of macro strategy at Monex Europe.

Oil prices continued to show some hopes of de-escalation that could allow exports from the Gulf to resume and benchmark Brent June futures were at $98.6 a barrel, well off their recent highs, but also well above pre-war levels. [O/R]

The Japanese yen was also a fraction stronger at 156.21 per dollar, having appreciated sharply on Wednesday with speculation that Japanese authorities had again intervened in markets to buy their currency.

Japan’s top currency diplomat Atsushi Mimura said on Thursday the country was not restricted on intervention.

U.S. Treasury Secretary Scott Bessent will meet Japan’s Prime Minister Sanae Takaichi next week, and the Nikkei newspaper said they would discuss curbing speculative yen selling, among other issues.

Sources told Reuters that authorities intervened on Thursday last week, with money market data suggesting they sold about $35 billion to support the yen. Since then, the market has seen three abrupt spikes in the yen through to Wednesday.

But analysts do not expect the yen to remain firm for long.

“Without stronger BOJ follow-through via consecutive hikes to address its behind-the-curve stance, the yen is likely to remain weak in the near term,” said Masahiko Loo, senior fixed income strategist at State Street Investment Management.

Repeated interventions raise the likelihood of broader policy action in the June–July window, consistent with the late 2024 playbook, Loo added.

Elsewhere, Norway’s crown strengthened after the central bank raised its policy rate to 4.25% from 4% and warned inflation was too high. The dollar slid 0.6% to 9.249 crowns, while the euro was 0.4% lower at 10.878.

The risk-sensitive Australian dollar rose 0.3% and last fetched $0.7242, just below the four-year high it touched on Wednesday. [AUD/]

The Swedish crown was slightly stronger at 10.846 per euro and 9.21 per dollar after the central bank said the risk that the Middle East war would lead to higher inflation had increased somewhat, though it kept its policy rate unchanged at 1.75%, as expected.

(Reporting by Alun John in London and Wayne Cole in Sydney, additional reporting by Ankur Banerjee in Singapore; Editing by Kim Coghill and Clarence Fernandez)