Dollar hits one-week high as Middle East tensions reignite

By Ankur Banerjee and Gregor Stuart Hunter

SINGAPORE/TOKYO, April 20 (Reuters) – The U.S. dollar firmed to its highest level in a week against major currencies on Monday as renewed U.S.-Iran tensions and shaky prospects of a peace deal in the Middle East sent investors toward safe havens.

The United States said on Sunday that it had seized an Iranian cargo ship that tried to run its blockade while Iran said it would retaliate amid growing worries of a resumption of hostilities.

Tehran also said it would not participate in a second round of negotiations that the U.S. had hoped to kick off before its two-week ceasefire with Iran expires on Tuesday.

“The weekend escalation revives the geopolitical risk premium just as markets had started pricing a peace dividend,” said Charu Chanana, chief investment strategist at Saxo, adding that higher oil “is not just an energy story, it is a growth-and-rates story.”

The euro slipped 0.14% to $1.1746 and sterling fell 0.29% to $1.3479. The risk-sensitive Australian dollar sank 0.3% to $0.7145 in early trading.

The dollar index, which measures the U.S. currency against six peers, was at 98.38, hovering near its highest in a week and recouping some of its recent losses.

The index is down 1.5% in April as investor appetite for risk picked up during the month as hopes had risen for a peace deal. The index had surged 2.3% in March on haven demand after the war broke out.

Analysts at Barclays said their sentiment data showed investors still favoured the dollar, so it had more room to drop should the situation in the Middle East normalise.

“Any (market) wobble would likely have less space to extend and may even prove opportune to re-establish short dollar exposures,” they said in a note dated Sunday. “The question here remains on whether this wobble is even worth trading given all the related noise and uncertainties.”

Now in its eighth week, the war has created the most severe shock to energy supplies in history, sending oil prices surging because of the de facto closure of the Strait of Hormuz, which typically handles about a fifth of the world’s oil shipments.

The United States has maintained a blockade of Iranian ports, while Iran has lifted and then reimposed its own blockade on marine traffic passing through the crucial waterway.

That spurred a rebound in oil prices on Monday. Brent crude futures jumped 7% to $96.8 a barrel and U.S. West Texas Intermediate was at $90.74 a barrel, up over 8%. [O/R]

“The key is still the Strait of Hormuz for many, and hopes that we could see the U.S. and Iran sit down at the negotiating table before the ceasefire ends now seem remote,” said Nick Twidale, chief market strategist at ATFX Global in Sydney.

“For now, I think we will see further downside moves for risk in the coming sessions.”

The New Zealand dollar eased slightly to $0.5876.

The yen weakened to 159.06 per dollar, just shy of the crucial 160 level that traders worry could lead to intervention to support the Japanese currency.

Investor focus will also be on the Bank of Japan meeting later this month. Governor Kazuo Ueda has refrained from pre-committing to an April rate hike with the war muddling the outlook, but he left a few hawkish signs after last week’s IMF meetings, suggesting tighter policy by June.

In cryptocurrencies, bitcoin was down 0.56% at $74,229.65, and ether shed 0.2% to $2,276.04.

(Reporting by Gregor Stuart Hunter and Ankur Banerjee; Editing by Lisa Shumaker and Kevin Buckland)