Safe-haven dollar near six-week lows on hopes of fresh Iran talks

SINGAPORE - The US dollar lingered near six-week lows on Wednesday, surrendering nearly all the gains it had made since the Middle East war erupted as hopeful signs of another round of talks between the US and Iran lifted risk appetite.

Tehran has effectively shut the Strait of Hormuz, a crucial waterway for a fifth of global oil and gas shipments, since the US-Israel war with Iran began on February 28, a move that has sent oil prices surging and dampened investor sentiment.

Washington imposed a blockade on Iranian ports after the collapse of weekend negotiations but hopes grew as US President Donald Trump said on Tuesday talks to end the war could resume in Pakistan in the coming days.

The euro bought USD 1.1793, hovering near its highest since March 2. Sterling was at USD 1.3574. The dollar index, which measures the US currency against six units, was at 98.109, near its lowest in over six weeks.

Although talks in Islamabad last weekend failed to produce a breakthrough - raising doubts over the durability of a two-week ceasefire that still has a week to run - investors are clinging to hopes that diplomacy could yet deliver a resolution.

"There is a growing expectation that the standoff will soon be resolved, allowing the US administration to pivot towards declaring victory, before stimulating the economy ahead of the midterms," Tony Sycamore, market analyst at IG.

Brent crude futures fell 0.28% to USD 94.52 a barrel after tumbling 4.6% in the previous session. US West Texas Intermediate crude was down 0.7% to USD 90.64 after dropping 7.9% on Tuesday.

That spurred a risk-on rally across asset classes with stocks surging and the risk sensitive Australian dollar hitting its highest level since March 12. The Aussie was steady at USD 0.7124 in early trading.

"Cross-asset moves suggest investors are increasingly pricing the conflict as a temporary energy shock that could fade if diplomacy holds," OCBC strategists said in a note. "The broader signal was decisively risk-on rather than defensive positioning."

The Japanese yen was little changed at 158.88 per US dollar in early trading. Bitcoin was 0.6% higher at USD 74,612, just below the two month high it touched on Tuesday.

(Reporting by Ankur Banerjee in Singapore; Editing by Shri Navaratnam)