Dollar steady as markets brace for busy central bank week amid mideast war

Dollar Holds Near 10-Month High Ahead of Busy Central Bank Week and Mideast Tensions

Market Movements and Central Bank Meetings Amid Geopolitical Uncertainty

By Rae Wee

Dollar Performance and Investor Sentiment

SINGAPORE, March 16 (Reuters) - The dollar held near a 10-month high on Monday in a tentative start to the week, as investors braced for a slew of central bank meetings under the shadow of the U.S.-Israel war on Iran.

At least eight central banks, including the U.S. Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan meet this week to set rates, in their first policy meetings since the Middle East conflict began.

Focus will be on policymakers' assessment of the impact of higher oil prices on inflation and growth.

Risks to Growth and Inflation

"The war ... poses downside risk to economic growth and upside risks to inflation, so central bank responses will very much depend on the recent context, specifically whether inflation has been above, on, or below target," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

Currency Movements

Ahead of the meetings, the dollar retraced some of last week's strong gains, leaving the euro bouncing slightly from a 7-1/2-month low hit earlier in the session to trade 0.14% higher at $1.1433.

Sterling was up 0.17% at $1.3245, though was not far from the 3-1/2-month low it hit on Friday as it clocked a 1.5% weekly decline.

The dollar index eased slightly to 100.20, but remained perched near last week's 10-month high.

Geopolitical Developments and Oil Prices

Strait of Hormuz and Global Energy Security

U.S. President Donald Trump said on Sunday he is demanding that other countries help protect the Strait of Hormuz, adding that Washington is in talks with several nations about policing the critical shipping lane for oil and gas.

He warned in a separate interview with the Financial Times that NATO faces a "very bad" future if U.S. allies fail to assist in opening up the Strait.

Impact on Markets and Central Bank Policy

The prospect of easing global energy disruptions sent oil prices down slightly, but markets remained in disarray with geopolitical tensions still running high and uncertainty over when the war, now in its third week, could end.

"As things stand now, the likelihood we will really see a change in current trajectory for central banks and their monetary policies around the world is, in our view, very, very limited," said Jorry Noeddekaer, head of global emerging markets and Asia at Polar Capital, whose base case is for the war to be relatively short-lived.

Central Bank Outlooks and Currency Reactions

RBA to Hike, BOJ in Difficult Spot

The Australian dollar was up 0.55% at $0.7019, buoyed by hawkish rate expectations at home as the Reserve Bank of Australia is seen tightening policy on Tuesday.

Markets are now pricing in a 74% chance that the RBA could deliver a 25-basis-point hike.

"We are now pencilling two more hikes, one this week and another in May," said CBA's Kong.

"In Australia, inflation was already too high even before the Middle East conflict started, so with the new energy price shock, that will further increase risks to inflation."

Japanese Yen and BOJ Policy Challenges

The yen meanwhile languished near the 160-per-dollar level and last stood at 159.44.

The Japanese currency has come under pressure due to the nation's heavy reliance on the Middle East for energy supplies, with the war also throwing into question the BOJ's rate outlook.

"For Japan, the key risk is not simply higher oil prices, but a deterioration in terms of trade driven by the costs of imported energy and logistics, compounded by yen weakness and constrained monetary policy flexibility," said Amova Asset Management's chief global strategist, Naomi Fink.

"Markets - especially foreign exchange - may be underestimating the probability of these pressures forcing a more difficult policy trade-off for the Bank of Japan."

Other Currency Moves and U.S.-China Talks

Elsewhere, the New Zealand dollar was up 0.47% at $0.5803, while the offshore yuan strengthened slightly to 6.9002 per dollar.

Top U.S. and Chinese economic officials held "remarkably stable" talks in Paris on Sunday that touched on potential areas of agreement in agriculture, critical minerals and managed trade for Trump and Chinese President Xi Jinping to consider in Beijing, sources said.

(Reporting by Rae Wee; Editing by Himani Sarkar)