FOREX-Dollar drops as Iran ceasefire prompts risk-on turn for markets

By Gregor Stuart Hunter and Alun John

SINGAPORE/LONDON, April 8 (Reuters) - The dollar sank to its lowest level in a month against a basket of currencies, tumbling against all developed market peers including the euro, yen, and sterling after the United States and Iran agreed to a two-week ceasefire.

The euro rose 0.9% to $1.1698, EUR= its highest since early March, the pound gained 1% to $1.3428, GBP= while the dollar slid nearly 1% on the yen to 158.12. JPY=

U.S. President Donald Trump had earlier threatened widespread attacks on Iran's civilian infrastructure, drawing international condemnation after issuing an extraordinary warning that "a whole civilization will die tonight" if his demands were not met.

The currency moves came alongside a dramatic rally in stocks and government bonds, as investors' risk appetite rapidly returned after the ceasefire was announced less than two hours before Trump's deadline for Tehran to reopen the Strait of Hormuz would have expired. MKTS/GLOB

Trump said the deal was subject to Iran's agreement to pause its blockade of oil and gas supplies through the strait, which typically handles about one-fifth of global oil shipments.

If the strategic waterway is reopened, "we could be able to consolidate the risk-on rally that we're seeing," said Ray Attrill, head of FX strategy at National Australia Bank in Sydney.

"But a lot has to happen in the next 14 days," he said, adding that currencies would be vulnerable to a retracement of their recent moves in the interim. "Markets still need to proceed with a degree of scepticism."

The dollar has been the major currency market gainer of the Iran war, with the dollar index rising 2.2% in March as traders anticipated the United States' position as a net energy exporter meant it would take a smaller economic hit than importers like Japan and most European countries.

The index, which measures the greenback's strength against a basket of six currencies, weakened for a third consecutive day to lows of 98.838, its weakest since March 11. =USD

Traders' attention turned to central banks' next moves as oil prices fell sharply on Wednesday. Brent crude LCOcv1 slid 13.4% to $94.68 a barrel but was still well above pre-war levels.

Markets now see around a 50% chance of a Federal Reserve rate cut by year-end, having earlier seen no such move. 0#USDIRPR

They see two European Central Bank rate hikes by January. Last week they were nearly pricing three. 0#EURIRPR

Elsewhere, the kiwi dollar NZD= climbed 1.7% to $0.5825, extending gains after the Reserve Bank of New Zealand kept its policy rate at 2.25% on Wednesday for a second straight meeting, choosing to sit tight as it gauges the economic fallout from the war. But the central bank signalled it is ready to act if inflation pressures intensify.

Markets were also watching the especially sensitive Korean won, KRW= which strengthened 1.6% to 1,477.10 - its biggest one-day appreciation since the Iran war began - shrugging off fresh geopolitical tensions on the Korean peninsula.

South Korea's military said North Korea fired several ballistic missiles toward the sea off its east coast on Wednesday, following a separate launch detected a day earlier.