FOREX-Dollar softer vs. pound, euro with Middle East conflict in focus

By Johann M Cherian, Laura Matthews

June 20 (Reuters) - The dollar weakened against the euro and the pound on Friday, but was set for its biggest weekly rise in more than a month as uncertainty about a raging war in the Middle East and the potential repercussions for the global economy fuelled an appetite for traditional safe havens.

Israel and Iran have been waging a week-long air battle as the Israeli government seeks to thwart Tehran's nuclear ambitions, and market participants are nervous about possible U.S. attacks on Iran, sparking a surge in the greenback.

The dollar index, which measures the U.S. currency =USD against six peers, including the Swiss franc, the Japanese yen, and the euro, is poised to rise 0.6% this week.

Iran said on Friday it would not discuss the future of its nuclear programme while under attack by Israel, as Europe tried to coax Tehran back into negotiations.

Meanwhile, the White House said on Thursday that President Donald Trump would decide on the potential involvement of the United States in the conflict in the next two weeks.

That helped soothe nervous investors worried about an imminent U.S. attack on Iran, even though the prospect of a broadening Middle East conflict kept risk appetite in check.

"I think we're just consolidating," said Marc Chandler, chief market strategist at Bannockburn Global Forex. "We're going into a weekend in which there is uncertainty."

Brent crude fell more than 2%, but at around $77 a barrel, it was close to the January peak it hit last week.

The drop supported the currencies of net oil-importing economies such as the euro and the yen. The euro EUR=EBS firmed 0.15% to $1.1517, while the yen JPY=EBS slipped 0.23% to 145.8 per dollar.

The recent spike in oil prices added a new layer of inflation uncertainty for central banks across regions, which have been grappling with the potential impact of U.S. tariffs on their economies.

Although the Federal Reserve this week stuck with its forecast of two interest rate cuts this year, Chair Jerome Powell warned of "meaningful" inflation ahead.

Analysts saw the central bank's delivery as a "hawkish tilt" further underpinning the greenback's gains this week.

"Whatever small safe-haven effect you had to the dollar is now gone because President (Trump) is now talking about two weeks of negotiations," said Joseph Trevisani, senior analyst at FX Street. "You're not seeing a great deal of movement out of it. People are not quite as afraid as they were before."

The Swiss franc CHF=EBS was 0.15% lower at 0.8177 per dollar but was set for its largest weekly drop since mid-April after the country's central bank lowered interest rates to 0%.

Investors were, however, taken aback by an unexpected 25-basis-point interest rate cut by Norges Bank, and the krone NOK=D3 is down more than 1% against the dollar this week.

Though geopolitical tensions were the main market focus this week, concerns about a trade war and the impact it may have on costs, corporate margins, and overall growth are ever-present, as Trump's early July tariff deadline looms. These concerns have weighed on the dollar, which is down about 9% this year.

Currencies positively correlated to risk sentiment, such as the Australian AUD=D3 and New Zealand NZD=D3 dollars, remained flat.

Elsewhere, the yuan CNY=CFXS was last trading at 7.1750 after China kept benchmark lending rates unchanged as expected.

Sterling GBP=D3 was last up 0.1% to $1.3483, returning close to earlier levels after briefly paring some gains as British retail sales data showed volumes recorded their sharpest drop since December 2023 last month.