Dollar regains ground as investors doubt swift end to Iran war

LONDON, March 24 (Reuters) – The dollar regained some ground on Tuesday as investors remained doubtful the war in the Middle East could be quickly resolved, even though U.S. President Donald Trump delayed the bombing of Iranian power stations and energy infrastructure.

Trump on Monday said that the U.S. and Iran had held “very good and productive” conversations about a “complete and total resolution of hostilities in the Middle East”. Iran denied it had engaged in any direct negotiations.

Trump’s comments were “giving a breather to volatility at least, but it’s difficult to see that this is going to trigger a risk-on trend,” said Rodrigo Catril, ‌currency strategist at National Australia Bank.

Trump’s track record for unpredictable policy has kept markets wary and traders were uncertain whether he had begun genuine negotiations or only retreated from volatility-inducing threats, Catril said.

EARLY SIGNS OF ECONOMIC IMPACT

Survey data on Friday showed early signs that the war was starting to impact the global economy. Business activity in the euro zone and Britain fell to multi-month lows, suggesting Europe was already suffering economically from the conflict.

The euro was last down 0.2% against the dollar at $1.1593 after gaining 0.4% in the previous trading session. Sterling eased 0.4% to $1.3406 after jumping 0.9% on Monday.

Tommy von Brömsen, FX strategist at Handelsbanken, said Trump’s comments were a signal that he was looking for an end to the war.

“Once we get an end, I think we’re going to see some reversal of the FX moves that we’ve seen so far, which would mean a weaker dollar,” von Brömsen said.

SEVERE DISRUPTION OF ENERGY TRADE

The contrasting comments and a new wave of fighting have left markets in flux, with investors mindful that the war has all but halted shipments of about one-fifth of the world’s oil and liquefied natural gas through the Strait of Hormuz.

Oil prices rose again on Tuesday after plunging more than 10% on Monday.

The U.S. is a net energy exporter, which has supported the dollar since the start of the war as energy prices soared.

The dollar index, which measures the U.S. currency against a basket of peers, rose 0.1% on Tuesday to 99.293 after dipping 0.4% to near a two-week low on Monday.

The index has still strengthened 1.7% this month, on track for its strongest monthly gain since October, as the conflict also fuelled safe-haven demand.

The expected inflationary impact from the jump in energy prices has also prompted markets to scale back expectations of rate cuts from the Federal Reserve, although investors are not yet pricing in any tightening this year.

They are, however, for other banks. Markets have priced in at least two hikes each from the European Central Bank and the Bank of England this year.

“I think most central banks are in wait-and-see mode to see how severe and how persistent this (inflation) will be,” said Handelsbanken’s von Brömsen.

The two-year U.S. Treasury yield, which typically moves in step with Fed rate expectations, rose 5 basis points to 3.878% on Tuesday after dropping over 6 bps on Monday. [US/]

(Reporting by Samuel Indyk in London, Jiaxing Li in Hong Kong and Ankur Banerjee in Singapore; Editing by Kevin Liffey and Barbara Lewis)