The dollar firmed to a one-week high on Thursday after Middle East tensions ratcheted up following fresh US strikes on Iran, while the yen softened toward a level that triggered central bank intervention last month.
Iran's Revolutionary Guards said they targeted a US airbase after what they described as an early morning US attack near Bandar Abbas airport, Tasnim news agency reported, while Kuwait's army said its air defenses were intercepting hostile missile and drone threats.
That followed news that the US military carried out new strikes targeting an Iranian drone operation that it said posed a threat to US forces and commercial shipping in the Strait of Hormuz.
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.
"Geopolitics and the subsequent inflation risks remain a key concern," Alex Saunders, Citi's head of global quant macro strategy, wrote. "We continue to see a trim in the USD underweight."
The euro was 0.2% lower at $1.1600, while the pound was down nearly 0.3% at $1.3392.
The risk-sensitive Australian dollar weakened 0.4% to $0.7111to a one-week low, and the New Zealand dollar was down 0.3% at $0.58831.
The dollar index, which measures the greenback's strength against a basket of six major peers, strengthened 0.17% to 99.464, near its highest level since May 21.
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.
The yen weakened to as far as 159.610 per dollar 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.
