By Tom Westbrook
SINGAPORE, April 10 (Reuters) - The dollar on Friday was heading for its largest weekly drop since January as other currencies gained on optimism that a ceasefire in the Gulf will hold and oil shipping will resume.
Further direction for markets is likely to hang on the outcome of weekend talks between the U.S. and Iran in Islamabad.
The dollar had towered in March as one of the few bastions of safety as the U.S. and Israeli war on Iran sent oil prices rocketing, hit stocks and gold
and inflation worries sank bonds.
But since a shaky ceasefire was agreed on Tuesday those positions are being unwound, with the U.S. dollar index losing 1.3% so far this week.
The euro has rallied through its 200-day moving average this week to trade at $1.1690, a break of chart resistance that opens the way to further gains.
The risk-sensitive Australian and New Zealand dollars are looking at weekly rises of nearly 3% on the dollar, with the Aussie trading just above 70 cents and the kiwi at $0.5847. Sterling has shot up 1.8% this week and above its 200-day moving average to $1.3424.
Even the yen, under intense pressure from Japan's low interest rates, government spending plans and the country's dependence on imported oil, is just above recent lows at 159.2 to the dollar.
"People were buying the U.S. dollar when the war was at its most intense moment and now they're selling as the tail risk of a really bad outcome has faded quite a bit," said Jason Wong, senior strategist at BNZ in Wellington.
"Even though it still looks a bit shaky, the ceasefire removing that tail risk is important from a sentiment point of view," he said, though noting that could turn around very quickly if anticipated weekend peace talks don't yield progress.
In the first 24 hours of the ceasefire, just a single oil products tanker and five dry bulk carriers sailed through the Strait of Hormuz, which before the war accommodated about 140 ships a day and about a fifth of the world's oil and liquefied natural gas flows.
Iranian officials arrived in Islamabad on Thursday and a U.S. delegation, led by Vice President JD Vance, arrives on Friday to discuss what investors hope can be a lasting peace.
"If there's positive talks, that would be dollar negative. And if we get to Monday and talks went badly and there's still a lack of ships...things could turn around quickly," said Wong.
South Korea's central bank kept its policy interest rate steady on Friday, as expected, leaving the won at 1,478 to the dollar, having recovered from beyond 1,500.
The week's dollar softness has sent China's yuan - which has never really fallen since war began at the end of February - to its strongest levels since 2023. In offshore trade it sat at 6.83 per dollar on Friday.
"The CNY has been a surprising winner of the Iran war, despite China's role as the largest oil importer in the world," said ING economist Lynn Song.
"At least a few market participants have mentioned re-evaluating the 'China risk premium' amid rising global uncertainty elsewhere, which has led to China looking more and more like the adult in the room."
(Reporting by Tom Westbrook; Editing by Edwina Gibbs)
