Dollar pushes to one-week high as Middle East tensions reignite

The U.S. dollar firmed to its highest level in a week against major currencies on Monday before paring gains as renewed U.S.-Iran tensions and fading hopes for a Middle East ‌peace deal sent investors toward safe havens.

The United States said on Sunday that it had seized an Iranian cargo ship that tried to run its blockade, while Iran said it would retaliate, stoking fears about a resumption of hostilities.

Tehran also said it would not participate in a second round of negotiations that the U.S. had hoped to kick off before its two-week ceasefire with Iran expires on Tuesday.

"The weekend escalation revives the geopolitical risk premium just as markets had started pricing a peace dividend," said Charu Chanana, chief investment strategist at Saxo, adding that higher oil "is not just an energy ⁠story, it is a growth-and-rates story."

At the same time, compared to the sharp jump in oil prices, moves in currency markets were restrained, with the dollar giving back some of its early gains by mid-morning in Asia.

The euro last bought $1.1757 after hitting a one-week low of $1.1729 earlier in the session, while sterling was 0.11% lower at $1.3503. The risk-sensitive Australian dollar fell 0.17% to $0.7155.

The dollar index , which measures the U.S. currency against six peers, was at 98.30, hovering near its highest in a week and recouping some of its recent losses.

The index is down 1.5% in April amid rising risk appetite on hopes for a peace deal. The index had surged 2.3% in March on haven demand after the war broke out.

Chris Weston, head of research at Pepperstone, said while the tone is risk-off to start the week, the move so far "appears orderly rather than indicative of a major volatility shock."

"Market participants understand that the path to a formal agreement was ‌unlikely to ⁠be linear and remains vulnerable to sudden changes, so market players won't be wholly surprised by a sentiment shift," Weston said.