Dollar steady with focus on Middle East conflict, central bank meetings

By Johann M Cherian

(Reuters) -The dollar held its ground in choppy trading on Monday, as investors keenly monitored Israel-Iran fighting for any signs that it could escalate into a broader regional conflict and braced for a week packed with central bank meetings.

As both Iran and Israel showed no signs of backing off from their attacks, market participants mulled the prospect that Tehran might seek to choke off the Strait of Hormuz - the world's most important gateway for oil shipping - which could raise broader economic risks from disruptions in the energy-rich Middle East.

Crude prices were up about 1% after closing 7% higher on Friday following Israel's preemptive strike on Iran. [O/R]

On Monday, the dollar was flat at 144.08 Japanese yen after rising nearly 0.4% earlier in the session, while the euro was muted at $1.1555.

The greenback was also steady against the Swiss franc at 0.811, while an index that measures the dollar against six other currencies dipped 0.1% and was last at 98.11.

Currencies that are positively correlated to risk such as the Australian dollar and the New Zealand dollar were marginally higher, while oil exporter Norway's krone firmed 0.3% to hit its highest since early 2023.

"The dollar's role as a safe haven will surely be tested, and recent price action has been inconclusive," said Win Thin, global head of markets strategy at Brown Brothers Harriman.

"If the Fed delivers a dovish hold as we expect, the dollar is likely to resume weakening due to the worsening fundamental backdrop in the U.S." 

Geopolitical tensions were the latest twist for investors and central bank policymakers who have been trying to navigate economic uncertainty triggered by U.S. President Donald Trump's move to reshape the global trade order this year.

Despite the dollar's broader rise in the past few sessions, analysts were less convinced that the trend could continue until there was more clarity on the tariff front.

The U.S. currency has lost more than 9% in value this year as investors remain nervous over Trump's deadline on trade deals due in about three weeks, while agreements with major trade partners including the European Union and Japan are yet to be signed.

Investors now will look for progress in any bilateral meetings with the U.S. on the sidelines of a Group of Seven leaders meeting in Canada.

Among major currencies, the euro has emerged as a favourite this year with gains of about 11%, sparking speculation that it could challenge the U.S. dollar's dominant status.

However, during an interview with Reuters, European Central Bank Vice President Luis de Guindos dismissed the possibility in the short term.

CENTRAL BANK MEETINGS

Top on the agenda this week is a host of central bank monetary policy decisions, with the spotlight on the U.S. Federal Reserve on Wednesday.

The central bank is widely expected to leave borrowing costs steady, but investors will likely lap up Fed's views on recent data that has broadly indicated softening economic activity even as risks to increasing price pressures stay high.

"What you're going to see from their growth forecasts is that the shift towards lower growth is very much upon us and that will keep the statement fairly neutral," said Chris Weston, head of research at Pepperstone.

The Bank of Japan is expected to deliver its interest rate decision at the end of its two-day meeting on Tuesday, with traders largely pricing in no change to policy.

Expectations are that the central bank could also consider tapering its government bond holdings from the next fiscal year as the Japanese government pushes for more domestic ownership.

Central banks in Britain, Switzerland, Sweden and Norway are also slated to unveil their policy decisions this week.

Longer-dated U.S. Treasuries were marginally higher after Friday's spike as investors considered the implications geopolitical tensions could have on price pressures.

(Reporting by Johann M Cherian in Bengaluru; Editing by Shri Navaratnam and Jamie Freed)