Dollar gains as hope fades for de-escalation in Iran

By Laura Matthews

NEW YORK, March 24 (Reuters) - The ‌dollar strengthened on Tuesday ​as investors ​dialed back expectations for a quick end to the Middle East conflict, reversing some of Monday's optimism-fueled moves.

The Pentagon plans to send thousands of troops from the 82nd Airborne Division to the region, adding to the military buildup ‌even as the Trump administration seeks talks with Iran.

"Geopolitical headlines this afternoon pushed the dollar and ⁠oil to their session highs on reports of U.S. plans to deploy an airborne division to the Middle East," said Uto Shinohara, senior investment strategist at Mesirow ‌Currency Management in Chicago. "Elevated headline risk is ‌reflected through high market sensitivity to such news."

In afternoon trading, the dollar rose 0.3% against the yen to 158.98 yen, while the dollar index, which measures the U.S. currency against a basket of peers, advanced 0.2% to 99.42 after dropping to ​a near two-week low on Monday.

The index has strengthened 1.8% this month, on track for its strongest monthly gain since October, as the conflict fueled safe-haven demand.

The euro slid 0.3% against the dollar to $1.1584, after gaining 0.4% in the previous trading ⁠session.

Sterling fell 0.5% versus the dollar to $1.3383 after jumping nearly 1% on Monday.

With geopolitics and energy still steering markets, investors showed little reaction to data on U.S. business ​activity, which slowed to an 11-month low in March as the war raised energy and other input costs, reinforcing concerns that inflation could accelerate.

Markets rallied on Monday after U.S. President Donald Trump ​said that the U.S. and Iran had held "very good and productive" conversations ‌about a "complete and total resolution of hostilities in the Middle East." Iran denied it had engaged in any direct negotiations. Trump's comments gave investors hope for a short war, but now markets seem to ⁠be taking a more measured tone.

"With risk of escalation and the jump in U.S. rates, tough to sell the U.S. dollar," said Marc Chandler, chief market strategist at Bannockburn Capital Markets in New York.

Survey data on Friday showed early signs that the war was starting to hit the global ⁠economy. Business activity in the euro zone and Britain fell to multi-month lows, suggesting Europe was already suffering economically from the conflict.

SEVERE DISRUPTION OF ENERGY TRADE

Contrasting ​comments and a new wave of fighting have left markets in flux, with investors mindful that the war has all but halted shipments of about one-fifth of the world's oil and liquefied natural gas through the Strait of Hormuz.

Oil prices rose again on Tuesday after plunging more than ‌10% on Monday.

The expected inflationary impact from the jump in energy prices has also prompted markets to scale back expectations of rate cuts from the Federal Reserve.

Markets have priced in at least ‌two hikes each from the European Central Bank and the Bank of England this year.

The two-year U.S. Treasury yield, which typically moves in step ⁠with Fed rate expectations, rose 8.7 basis points to ‌3.919% on Tuesday after dropping over ​6 bps on Monday. [US/]

(Reporting by Laura Matthews in New York; Additional reporting by Samuel Indyk in London, Jiaxing Li in Hong Kong and Ankur Banerjee in Singapore; Editing by Kevin Liffey, Barbara Lewis, Ros Russell ‌and Edmund Klamann)

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