The US dollar wobbled on Monday as wavering hopes of a deal to end the Middle East war left investors on edge in a week when they will also be looking for direction from central bank policymakers on the impact of the conflict.
US President Donald Trump scrapped a visit to Islamabad by his envoys over the weekend, saying Iran could reach out if it wanted to negotiate an end to the two-month war, leaving the pivotal Strait of Hormuz effectively closed.
But sentiment got a lift after Axios reported, citing sources, that Iran offered the US a new proposal through Pakistani mediators on reopening the waterway and ending the war, with nuclear negotiations postponed for a later stage.
The euro cut earlier losses to trade flat at $1.1726, while sterling bought $1.3544, also pulling back a bit. The dollar index, which measures the US currency against six major peers, was at 98.465, down 0.18%.
The dollar benefited in March from safe-haven flows as the war erupted but shed most of those gains on hopes of a peace deal this month. It has steadied in recent days after US-Iran talks stalled.
"I have been surprised that the markets are so confident, perhaps even blase, about progress in talks and the prospect of a peace deal," said Kyle Rodda, senior financial analyst at Capital.com, noting the markets are priced for peace.
"The peace might not hold and if it doesn't the markets will have to re-price quite violently."
Although a ceasefire has paused full-scale fighting in the conflict, which began with US-Israeli strikes on Iran on February 28, no agreement has been reached to end the war, keeping shipping through the Strait of Hormuz at a standstill.
The war has sent oil prices surging, fueled inflation and cast a shadow over the outlook for global growth, with the closure of the strait, which normally carries a fifth of global oil and gas shipments, a key risk.
Brent crude futures were up 1% at $107.20 a barrel and US West Texas Intermediate at $95.80 a barrel, up 1.5% on Monday.
"While a bout of mild stagflation is baked in, the clock is now ticking on whether this turns into a more severe bout like that seen in the 1970s," said Shane Oliver, chief economist and head of investment strategy at AMP in Sydney.
FLURRY OF CENTRAL BANK MEETINGS
Investors will be watching several central bank meetings this week to gauge the impact of the war on prices and rate outlooks, with the Bank of Japan expected to keep rates steady on Tuesday but signal its readiness to hike as soon as June.
Unlike last year when higher US tariffs forced a pause in its rate-hike cycle, the BOJ will stress its resolve to keep raising rates as the energy shock risks fueling broad-based inflation, sources familiar with its thinking told Reuters.
The Japanese yen was steady at 159.26 per US dollar, just shy of the crucial 160 level that traders worry could prompt Tokyo to intervene in the currency markets.
The yen has been stuck in the 159 range since early March as investors assess the impact of the oil shock on energy-import-dependent Japan and the BOJ's tightening trajectory.
Gregor Hirt, global CIO for multi asset at Allianz Global Investors, said the resumption of the hiking cycle hinges on geopolitical stabilisation, noting that if tensions eased and the Strait of Hormuz became navigable again, hikes could be back on the table by summer.
"However, investors should not expect aggressive signalling at the April meeting. Instead, the BOJ will likely favor a strategy of incremental guidance to preserve optionality under uncertainty."
The Federal Reserve, the European Central Bank and the Bank of England are all widely expected to hold rates steady this week, with markets looking for policymakers' views about the war's impact on the economy and the path for interest rates.
