FOREX-Dollar advances as Middle East tensions spur flight to safety

By Niket Nishant and Rocky Swift

LONDON/TOKYO, March 3 (Reuters) - The U.S. dollar extended gains on Tuesday as the deepening conflict in the Middle East prompted a flight to safety, spurred a jump in oil prices and heightened inflation concerns.

The euro and the yen remained under pressure, weighed down by their countries' reliance on energy imports and uncertainty over how central banks might respond to renewed price pressures.

While the dollar's status as a dependable safe haven has been questioned over the past year, it has benefited from the latest bout of risk aversion.

"As a major oil producer with the world's reserve currency, the U.S. is likely to be seen as a safe haven for investor funds," said Schwab Center for Financial Research's Chief Fixed Income Strategist Kathy Jones.

The euro EUR=EBS slid to its lowest level against the dollar since January and was last down 0.74% at $1.1603. Against the yen JPY=, the dollar strengthened 0.22% to 157.68 yen.

Europe and Japan are more exposed to higher energy costs than the U.S., which is a net energy exporter.

The dollar index =USD, which measures the greenback against a basket of currencies, rose 0.67% to 99.166, the strongest in more than a month.

However, Invesco strategists cautioned that the rally could be short-lived, highlighting that "tepid" dollar gains after U.S. strikes on Iran's nuclear sites last June quickly gave way to underperformance.

ESCALATING CONFLICT

Sterling GBP= weakened 0.88% to $1.3290, hitting its lowest since December. The currency had already been languishing due to domestic economic and political headwinds.

The euro was up 0.1% against the Swiss franc EURCHF= at 0.9115 francs. In a rare verbal intervention on Monday, the Swiss National Bank signalled that it would be willing to intervene to check the gains in the franc, which can hurt exporters.

"Europe and Japan stand out within the major economies, in that they still have a great need to import energy," Rodrigo Catril, a currency strategist at National Australia Bank, said on a podcast. "History will tell you that currencies such as the yen and the euro would struggle to perform."

'SENSE OF URGENCY'

Japanese Finance Minister Satsuki Katayama said financial officials are closely monitoring markets with an "extremely strong sense of urgency". When asked about the possibility of currency intervention, she said Japan had reached a common understanding with the U.S. last year.

"I think the initial knee-jerk reaction when conflict arises is always flight to safety," Serene Chen, JPMorgan's head of credit, currency and emerging market sales APAC, said at a media roundtable in Singapore. "So as a result, you would have seen gold rally, you were seeing people buying dollars, buying U.S. Treasuries."

Concerns that higher inflation will delay the Federal Reserve's next cut in interest rates also boosted the dollar.

A rate cut is no longer fully priced in until September, compared to previous expectations of July, based on pricing in the Fed funds futures market. Traders continue to price in two 25-basis-point cuts by year-end.