By Ankur Banerjee
SINGAPORE, April 27 (Reuters) - The U.S. dollar started Monday's session on the front foot as dimming hopes of a deal to end the Middle East war sapped the mood, keeping the Japanese yen pinned near the crucial 160 level ahead of the Bank of Japan's policy decision later in the week.
U.S. President Donald Trump scrapped a visit to Islamabad by his envoys over the weekend, saying Iran could reach out if it wants to negotiate an end to their two-month war, leaving the pivotal Strait
of Hormuz effectively closed.
That pushed oil prices higher at the start of the week, with Brent crude futures up about 2% at $107.49 a barrel and U.S. West Texas Intermediate at $96.17 a barrel, up $1.77 in early trade on Monday.
The euro eased 0.14% to $1.1706, while sterling bought $1.35155, down 0.12%. The dollar index, which measures the U.S. currency against six major peers, was at 98.623.
The dollar benefited in March from safe-haven flows as the war erupted but shed most of those gains on hopes of a peace deal this month. It steadied in recent days after U.S.–Iran talks stalled.
"I have been surprised that the markets are so confident, perhaps even blase, about progress in talks and the prospect of a peace deal," said Kyle Rodda, senior financial analyst at Capital.com, noting the markets are priced for peace.
"The peace might not hold and if it doesn't the markets will have to re-price quite violently."
Although a ceasefire has paused full-scale fighting in the conflict, which began with U.S.-Israeli strikes on Iran on February 28, no agreement has been reached on terms to end the war, keeping investors nervous.
The war has sent oil prices surging, fuelled inflation and cast a shadow over the outlook for global growth. The Strait of Hormuz, which normally carries a fifth of global oil and gas shipments, remains pivotal; the longer it stay shut the greater the risk to the global economy, analysts say.
"While a bout of mild stagflation is baked in, the clock is now ticking on whether this turns into a more severe bout like that seen in the 1970s," said Shane Oliver, chief economist and head of investment strategy at AMP in Sydney.
FLURRY OF CENTRAL BANK MEETINGS
Investor focus this week will be on a slew of central bank meetings to gauge the impact of the war on prices and rate outlooks, with the BOJ expected to keep interest rates steady on Tuesday but signal its readiness to hike as soon as June.
Unlike last year when higher U.S. tariffs forced a pause in its rate-hike cycle, the BOJ will stress its resolve to keep raising rates as the energy shock risks fuelling broad-based inflation, sources familiar with its thinking told Reuters.
The Japanese yen weakened to 159.51 per U.S. dollar, just shy of the crucial 160 level that traders worry could prompt intervention by Tokyo in the currency markets.
The yen has been stuck in the 159 range since early March as investors assess the impact of the oil shock on energy-import-dependent Japan and the BOJ's tightening trajectory.
Gregor Hirt, global CIO for multi asset at Allianz Global Investors, said the resumption of the hiking cycle hinges on geopolitical stabilization, noting that if tensions ease and the Strait of Hormuz become navigable again, hikes will likely return to the table by summer.
"However, investors should not expect aggressive signalling at the April meeting. Instead, the BOJ will likely favour a strategy of incremental guidance to preserve optionality under uncertainty."
The Federal Reserve, the European Central Bank and the Bank of England are all widely expected to hold rates steady this week, with markets looking for policymakers' views about the war's impact on the economy and the path for interest rates.
(Reporting by Ankur Banerjee in SingaporeEditing by Shri Navaratnam)
