By Rae Wee
SINGAPORE, March 5 (Reuters) - The dollar halted its blistering rally on Thursday, providing some reprieve to the battered euro as investors clung on to fragile assumptions that the war in the Middle East may not last as long as initially expected.
Investors were quick to take comfort in a report that Iran intelligence operatives signalled openness to talks with the CIA to end the war despite Tehran's subsequent denial, underscoring the fraught sentiment towards a conflict that has lashed
global markets.
The dollar further eased from an over three-month high hit earlier this week and stood at 98.78 against a basket of currencies.
The euro was meanwhile up marginally at $1.1636, having slid to a more than three-month low on Tuesday, while sterling steadied at $1.3366.
"I wouldn't say it was particularly good news, because Iran came out and kind of dismissed the report, and it is still clearly uncertain how long the war would drag on and the impact of it, but markets have certainly taken a relatively sanguine view," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
She added that sentiment was also helped by upbeat U.S. economic data released on Wednesday which showed that services sector activity surged to more than a 3-1/2-year high in February as businesses rebuilt inventories in anticipation of strong demand.
Still, the dollar held to its gain of over 1% for the week thus far, emerging as one of a handful of winners in a volatile few sessions that have dragged stocks, bonds and, at times, even safe-haven precious metals lower.
The spike in energy prices from the fallout of the Middle East war has stoked fears of a resurgence in inflation that could derail the rate outlooks for major central banks.
"Markets have largely traded the Middle East war as an inflation risk," said Bas van Geffen, senior macro strategist at Rabobank.
"In the case of the (Federal Reserve) and Bank of England that means fewer rate cuts are being priced, but EUR money markets are now pricing in around 40% odds that the (European Central Bank) may have to hike rates before the end of the year."
The yen similarly found some support on Thursday from a weaker greenback and rose 0.2% to 156.78 per dollar.
The Australian dollar was up 0.14% at $0.7085, extending its 0.57% gain from the previous session, while the New Zealand dollar was little changed at $0.5942.
Despite typically being a risk-sensitive currency, the Aussie has benefitted from a rare safe-haven bid this week as the country's energy abundance offset the impact of rising oil prices.
Elsewhere, the offshore yuan was up 0.12% at 6.8860 per dollar, ahead of the onshore open.
China set its economic growth target for 2026 at 4.5%-5%, a slight downgrade from the 5% pace achieved last year, which leaves room for greater, albeit not decisive, efforts to curb industrial overcapacity and rebalance the economy.
Bitcoin and ether fell about 1% each, having rallied strongly overnight as risk appetite improved.
(Reporting by Rae WeeEditing by Shri Navaratnam)
