FOREX-Dollar rises vs yen, Middle East conflict remains in focus

By Laura Matthews

June 20 (Reuters) - The U.S. dollar rose to a three-week high against the safe-haven yen and gained ground on the Swiss franc on Friday amid signs tension in the Middle East is easing after Iran backed continued discussions with Europe on its conflict with Israel.

Iran's Foreign Minister Abbas Araqchi said Tehran backed further talks with Germany, France, Britain and the EU and would be prepared to meet again in the near future following talks in Geneva.

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.

On the day, however, the index remains flat after a Federal Reserve governor said rate cuts should be considered as soon as July, given recent inflation data.

"The market's already expecting two rate cuts. That was just confirmed by the Fed this week. So, Mr. (Chris) Waller coming out and saying that, would indicate that it's coming sooner rather than later," said Joseph Trevisani, senior analyst at FX Street.

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.

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 rose 0.3% at $1.1534, while the yen JPY=EBS fell 0.29% to 145.88 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.

The Swiss franc CHF=EBS was flat at 0.8166 per dollar but was set for its largest weekly drop since the third week of 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 2% 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, were down 0.3% against the buck.

Elsewhere, the yuan CNY=CFXS was flat at 7.1820 after China kept benchmark lending rates unchanged as expected.

Sterling GBP=D3 was flat at $1.3471, paring earlier gains after British retail sales data showed volumes recorded their sharpest drop since December 2023 last month.

"The default setting may be position adjusting," said Marc Chandler, chief market strategist at Bannockburn Global Forex.