FOREX-US dollar surges as Middle East tension drives safety bid

By Niket Nishant, Gertrude Chavez-Dreyfuss and Rocky Swift

LONDON/NEW YORK/TOKYO, March 3 (Reuters) - The U.S. dollar posted sharp gains on Tuesday, hitting multi-month peaks against the euro, sterling and yen as tensions in the Middle East fuelled expectations of prolonged global inflation and triggered broad demand for safe‑haven assets.

A jump in crude prices has pushed traders to re‑evaluate the likelihood and timing of interest rate cuts by major central banks. Higher energy costs threaten to elevate consumer prices, particularly for economies heavily dependent on oil imports, making policymakers more cautious about easing financial conditions too soon.

In that context, the United States is increasingly viewed as a relative safe haven, supported by its higher degree of energy self‑sufficiency and generally resilient economic data, some analysts said.

This remains the case although recent market volatility and shifting geopolitical alignments have prompted debate over how durable the dollar's safe‑haven status will be over the longer term.

"The world is realizing that this conflict may go on for a long time, particularly as Iran seems willing to retaliate and not give any concessions," said Juan Perez, director of trading at Monex USA in Washington.

"This can change at any moment, but for now it makes sense for the buck to have a natural resurgence primarily as a result of military show of strength as a financial safe-haven asset."

In late-morning trading, the dollar surged against the euro EUR=EBS, which was last down 1.2% at $1.1554. Earlier in the session, the euro fell to its lowest level since late November.

President Donald Trump said the war could continue for weeks and that it was unclear who was in charge in Iran after the death of Supreme Leader Ayatollah Ali Khamenei. Israeli Prime Minister Benjamin Netanyahu sought to ease concerns about the timeline, telling Fox News it would not be an "endless war".

Against the yen, the dollar rose 0.3% to 157.74 yen JPY=EBS after earlier climbing to its highest since January 23, when the New York Federal Reserve reportedly conducted rate ​checks on the dollar/yen pair.

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

Sterling GBP= tumbled 1% on the day against the dollar to $1.3262, hitting its lowest since December. The currency had already been languishing because of domestic economic and political headwinds.

CAN DOLLAR SUSTAIN GAINS?

The dollar index =USD, which measures the greenback against a basket of currencies, rose 1.2% to 99.649, after earlier touching a more than three-month peak.

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

In Japan, Finance Minister Satsuki Katayama said financial officials were 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, told a media roundtable in Singapore.

Concerns that higher inflation will delay the Federal Reserve's next cut in interest rates also boosted the dollar. Rate cuts typically weigh on a currency.

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 were also less convinced that the Fed will be able to cut 25 basis points twice by year-end.

On Tuesday, rate futures factored in 46 bps in easing compared with 59 bps late last week, according to LSEG data.

The dollar also gained sharply against the Swiss franc, up 0.9% to 0.7864 franc CHF=EBS. Earlier, the greenback rose to its highest since late January.

The Swiss franc EURCHF= rose against the euro, which dipped 0.3% to 0.9088 franc.