Iran peace talk optimism trips dollar for second straight week

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HONG KONG, April 17 : The U.S. dollar was headed for a second consecutive weekly decline on Friday in cautious trade, as a ceasefire between Israel and Lebanon and prospects for fresh Iran talks prompted investors to unwind safe-haven positions.

A 10-day ceasefire between Lebanon and Israel went into effect on Thursday and President Donald Trump said the next meeting between the U.S. and Iran could take place over the weekend.

Meanwhile, U.S. and Iranian negotiators have scaled back ambitions for a comprehensive peace deal and are now seeking a temporary memorandum to prevent a return to conflict, with the nuclear issue remaining a core obstacle.

Currencies were mostly rangebound in Asia trade as investors awaited further details, leaving the euro steady at $1.1782. The common currency was on track for a third straight weekly gain, while sterling fetched $1.3525.

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Both currencies have now largely recouped losses triggered by the Iran conflict, hovering near their highest levels in seven weeks.

The dollar index, which measures the greenback's strength against six major peers, was steady at 98.235. It was on track for a second straight week of declines, having given up most of the gains sparked by the war, as ceasefire optimism continued to reduce demand for safe-haven assets.

"The markets are in a bit of a consolidation phase because they have already priced in some optimism about the ceasefire being extended earlier in the week," said Sim Moh Siong, FX strategist at OCBC.

"You will need the next catalyst to provide a more directional move. It's no longer a one-way street for the dollar from here."

The risk-sensitive Australian dollar fetched $0.7167, staying near four-year highs on buoyant risk sentiment. The kiwi traded roughly 0.1 per cent lower at $0.5887.

Against the yen, the dollar rose slightly to 159.47. Bank of Japan Governor Kazuo Ueda on Thursday steered clear of signalling a rate hike was on the cards this month, heightening the chance it will hold fire at least until June.

MARKETS WATCH CENTRAL BANK RESPONSE TO INFLATION RISKS

Investor are keen to see how policymakers will tackle war-induced inflation pressures, with central banks taking a largely cautious stance for now.

U.S. Treasury yields held steady on Friday, after rising in the previous session, as still-elevated oil prices kept inflation worries alive.

The two-year yield was last at 3.7816 per cent, while the benchmark 10-year yield was steady at 4.3193 per cent.

Fed funds futures show markets continue to bet that the Federal Reserve will keep rates on hold this year, sharply shifting from expectations of two rate cuts that were priced in before the war.

Group of Seven finance ministers and central bank governors have agreed to remain ready to act to mitigate economic and inflation risks caused by the Middle East conflict's energy price and supply shocks, French Finance Minister Roland Lescure said on Thursday.

The cautious tone was echoed by European Central Bank policymakers, who played down the chance of a rate hike as soon as this month, arguing that more data will be needed and the precise timing of a move was of secondary importance.

New applications for U.S. unemployment benefits fell more than expected last week, suggesting labor market conditions remained stable. That is also seen giving the Fed room to keep interest rates unchanged for some time while policymakers monitor the inflation fallout from the war.

"Hiking into a negative supply shock cannot compensate for energy-driven inflation in the near term and risks exacerbating growth headwinds," ANZ said in a research note.

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