FOREX: Dollar climbs to one-week high as Gulf tensions flare

The dollar firmed to a one-week high on Thursday as a fresh exchange of airstrikes between Iran and the U.S. dented hopes for a peace deal, while the yen softened towards a level that triggered central bank intervention last month.

Iran's Revolutionary Guards said on Thursday it targeted a U.S. airbase after the U.S. military carried out what a Washington official said were strikes aimed at an Iranian drone operation near the Strait of Hormuz, hours after President Donald Trump rejected a report he was close to a compromise deal with Tehran.

Oil prices rebounded and the safe-haven dollar steadied as hopes of a swift resolution to the war faded, with investors now increasingly expecting the greenback to break higher as the Federal Reserve shifts its focus to battling inflation amid elevated energy prices.

"The situation in the Middle East remains very fickle, very murky," said Aidan Yao, senior investment strategist for Asia at Amundi Investment Institute.

"There is still a lot of uncertainty as to how much progress we have made in reaching a potential deal," he said, adding Amundi expects oil prices to hover around $100 a barrel on average over the second quarter.

The euro EUR= was 0.2% lower at $1.1601, while the pound GBP= was down nearly 0.3% at $1.3387.

The risk-sensitive Australian dollar AUD=D3 weakened 0.3% to $0.7120, a one-week low, and the New Zealand dollar NZD=D3 was down 0.4% at $0.5876.

The dollar index =USD, which measures the greenback's strength against a basket of six major peers, strengthened 0.13% to 99.426, near its highest level since May 21.

Cryptocurrencies also slid as risk sentiment took a hit. Bitcoin BTC= was last traded 3% lower at $72,878.72, while ether ETH= was down 4.2% at $1,974.68.

Markets will now look ahead to today's release of the Fed's preferred inflation gauge, the core PCE deflator, which will help shape the broader interest rate outlook. USPCEM=ECI

The yen weakened to as far as 159.610 per dollar JPY= on Thursday, the lowest since April 30 and within sight of the 160 level that triggered intervention by Japanese authorities last month.

That intervention bought policymakers some breathing room, but questions linger over its lasting impact, said Tony Sycamore, market analyst at IG.

"The broader question is whether it was worth it for what essentially amounts to just a single month's relief. And furthermore, will authorities have the stomach to write a similar-sized cheque if the 160 level is breached again in the coming sessions?" he said.

Markets are pricing a roughly 70% chance of a quarter-point interest rate rise at the BOJ's June 15–16 policy meeting, LSEG data showed.

-Jiaxing Li/Reuters