FOREX-Dollar dips despite U.S.-Iran clashes, yen buoyed by intervention risk

With oil prices only modestly higher, investors remained cautiously optimistic about a swift resolution to the conflict, as a fragile ceasefire broadly held and reports indicated that U.S.-Iran talks were continuing. Analysts noted that positioning has returned to historical averages and is no longer as supportive for the dollar as it was a few weeks ago.

The dollar edged down on Friday ‌after renewed ​hostilities broke out between the U.S. and Iran but U.S. President Donald Trump said the ceasefire was still in effect. The two sides have occasionally exchanged fire since the ceasefire took effect on April 7, with Iran hitting targets in Gulf countries ‌including the UAE. With oil prices only modestly higher, investors remained cautiously optimistic about a swift resolution to the conflict, as a fragile ceasefire broadly held and reports indicated that U.S.-Iran talks were continuing.

Analysts noted that positioning has returned to historical averages and is no longer as supportive for the dollar as it was a few weeks ago. “The hope for risk bulls ‌is still that China is adding pressure on the U.S. to reach some kind of deal in the Gulf before the 14-15 May Trump-Xi summit,” said Francesco ‌Pesole, forex strategist at ING.

“The outlook is looking quite binary from here for the dollar, with the reaction in equities still likely to have a bigger bearing than oil volatility on the dollar,” he added. Stocks were down in Europe but futures on U.S. equity were up 0.30% after the S&P index dropped 0.38% on Thursday.

The dollar index measured against key peers fell 0.14% at 98.195, after hitting 97.623 earlier this week, ⁠its lowest level ​since February 27, a day before the ⁠war started. Investors flocked to the safe-haven dollar and sold currencies of oil-dependent economies such as Japan and the euro area after oil prices surged following Iran’s effective closure of the Strait of Hormuz. Markets are also bracing ⁠for the U.S. non-farm payrolls report later on Friday, and it may take an outlier number, particularly a sufficiently weak one, to really move the dial on dollar volatility, he added.

The euro was ​up 0.16% at $1.1743, poised to end the week a touch firmer. YEN SUPPORTED BY INTERVENTION RISKS

Traders remained focused on the Japanese yen after recent interventions and verbal ⁠warnings from Tokyo kept sharp selling at bay. The yen was roughly unchanged at 156.85 and is set to end the week on a steady footing. Japan faces no constraints on how often it can intervene in currency ⁠markets ​and is in daily contact with U.S. authorities, its top currency diplomat said on Thursday, reinforcing Tokyo's resolve to defend the embattled yen. "Against the current backdrop of elevated energy prices and rising yields, Japanese intervention can only act as a safety harness on the yen's descent, but it can't pull it to safety," said Tony Sycamore, market ⁠analyst at IG.

Until macro and technical conditions change, the yen is likely to keep testing the Bank of Japan's resolve, he added. Sterling climbed against the euro and ⁠the dollar on Friday after local election results ⁠in the UK so far confirmed expectations of significant Labour losses, with investors turning their attention to the outlook for British Prime Minister Keir Starmer.

The pound was up 0.26% at $1.3584. The Australian dollar fetched $0.7221, and the New Zealand kiwi changed hands at $0.5943, both on track ‌to post a winning week on ‌improved risk appetite in earlier days.