FOREX-Dollar advances as investors brace for Iran response

By Ankur Banerjee and Lucy Raitano

SINGAPORE/LONDON, June 23 (Reuters) - The U.S. dollar firmed on Monday with the yen at a more than six-week low as investors anticipated a response from Iran to U.S. attacks on its nuclear sites, though some analysts said the FX reaction had been relatively muted.

Iran said on Monday the U.S. attack on its nuclear sites had expanded the range of legitimate targets for its armed forces and called U.S. President Donald Trump a "gambler" for joining Israel's military campaign against the Islamic Republic.

ING FX strategist Francesco Pesole said the muted response in FX markets is due in part to a structural lack of appetite for long dollar positions.

"Markets need more than what would normally be required to enter long dollar positions," he said. "At the same time, markets are still not willing to price in a full-blown conflict in the area."

The major moves were in the oil market, with crude prices hitting a five-month high before dipping to trade lower on the day.

The dollar firmed 1.3% against the yen and was last at 147.7 JPY=EBS - its highest since May 15.

Bank of America strategists said dollar/yen can reprice higher if oil prices remain elevated, noting Japan imports almost all of its oil, more than 90% of which comes from the Middle East, while the U.S. is largely energy-independent.

The euro EUR=EBS declined 0.5% to $1.147, but was largely unfazed after euro area flash PMIs showed the region's economy flatlined for a second month in June.

Slightly improving UK flash PMIs failed to move the dial on sterling GBP=D3, which last fetched $1.3389, 0.46% lower against the dollar.

Meanwhile, the Australian dollar AUD=D3, often seen as a risk proxy, hit a one-month low and was last 1.1% weaker at $0.63815, while the New Zealand dollar NZD=D3 sank 1.3% to $0.589.

That left the dollar index =USD, which measures the U.S. currency against six other units, 0.38% higher at 99.3.

Carol Kong, currency strategist at Commonwealth Bank of Australia, said the markets are in wait-and-see mode on how Iran responds, with more worries about the positive inflationary impact of the conflict than the negative economic impact.

"The currency markets will be at the mercy of comments and actions from the Iranian, Israeli and U.S. governments," Kong said. "The risks are clearly skewed to further upside in the safe-haven currencies if the parties escalate the conflict."

Iran vowed to defend itself a day after the U.S. dropped 30,000-pound bunker-buster bombs onto the mountain above Iran's Fordow nuclear site. American leaders urged Tehran to stand down, while pockets of anti-war protests emerged in U.S. cities.

In a step towards what is widely seen as Iran's most effective threat to hurt the West, its parliament approved a move to close the Strait of Hormuz. Nearly a quarter of global oil shipments pass through the narrow waters that Iran shares with Oman and the United Arab Emirates.

While the dollar has reprised its role as a safe haven due to the rapid spike in geopolitical risks, the relatively muted moves suggest investors remain wary of going all-in on the greenback.

The U.S. currency has dropped 8.6% this year against its major rivals as economic uncertainty from President Donald Trump's tariffs and concern over their impact on U.S. growth led investors to scurry for alternatives.

Markets are also looking ahead to Federal Reserve Chair Jerome Powell’s semi-annual testimony to Congress.

Elsewhere bitcoin BTC= was up 1.8% after dropping about 4% on Sunday.