FOREX-Dollar set for second straight weekly fall despite US-Iran clashes

The dollar was down and heading ​for a second straight weekly fall on Friday as investors ‌stayed cautiously ​optimistic about a swift end to the Middle East conflict, after President Donald Trump said the ceasefire remained in place despite renewed U.S.-Iran hostilities.

The dollar was down and heading ​for a second straight weekly fall on Friday as investors ‌stayed cautiously ​optimistic about a swift end to the Middle East conflict, after President Donald Trump said the ceasefire remained in place despite renewed U.S.-Iran hostilities. 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.

Analysts flagged that oil prices were modestly higher, a fragile ceasefire broadly held and reports indicated that U.S.-Iran talks were continuing. They also 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 U.S. stock index futures rose on Friday as a recovery in chipmakers helped offset worries about renewed U.S.-Iran tensions. The dollar index measured against key peers fell 0.28% at 97.96, after hitting 97.623 earlier this week, its lowest level since February 27, a day before the war ⁠started. It was set ​for a weekly drop of 0.22% after ⁠falling 0.31% the previous week.

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.

"An unchanged unemployment rate and ​labour force participation rate are also expected, so the report should not alter the outlook for the Fed," said Volkmar Baur, forex analyst at Commerzbank. The euro was up ⁠0.35% at $1.1765, 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 ⁠156.78. 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.

"The reports of clashes between the U.S. and Iran in the Strait of Hormuz certainly raises the risk of a renewed jump in crude oil ⁠prices that scuppers Japan’s efforts to halt a move in dollar/yen through the 160-level," said Derek Halpenny, head of research global markets at MUFG. Analysts argued that until macro and ⁠technical conditions change, traders are likely to keep testing ⁠the Bank of Japan's resolve.

The pound and UK government bonds climbed on Friday after British Prime Minister Keir Starmer said he would not resign despite bruising losses for his ruling Labour Party in local elections. The pound was up 0.40% at $1.3603.

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.