Dollar holds steady as Middle East tensions simmer, oil rises

By Shashwat Chauhan

Oct 21 (Reuters) - The dollar held steady against most major currencies on Wednesday as investors weighed developments in the Middle East conflict, which has revived demand for the US currency as a safe haven amid concerns about oil-driven inflation.

The euro slipped 0.1% to $1.122 and is now down almost 1% this month. Traders remained cautious on the single currency as France grapples with widespread anti-government protests and a worsening fiscal outlook that has pushed its 10-year borrowing costs to 24-year highs.

"The French debt situation isn't tractable. They do need to go in and make proper adjustments on the fiscal side to get this debt level down to at least show the seriousness around the trajectory," said John Hardy, global head of macro strategy at Saxo in Copenhagen.

"It's a concern (for the euro), but it's not a panic by any means just yet."

France will deploy troops alongside police and mount a major security operation ahead of further protests planned for Saturday, the government said on Tuesday, acknowledging shortcomings in its response to violence last weekend.

Sterling inched 0.1% up to $1.338. Data showed UK inflation rose more than expected last month, strengthening the case for a Bank of England rate increase in November and adding pressure on the government to support households in next week's budget.

The pound rose 0.1% against the euro, up for the fifth straight session and at its strongest level in 17 months, pinning the European common currency down at 83.86 pence.

The yen firmed at 157.96 per dollar. Bank of Japan Deputy Governor Ryozo Himino said underlying inflation was close to the central bank's 2% target and financial conditions remained loose, signalling scope for higher borrowing costs.

The dollar index , which measures the US currency against six peers, was little changed at 101.7 after declining almost 0.3% on Tuesday and touching 101.50, its lowest since October 1.

Investors have gravitated towards the dollar this week as volatility has increased amid the US-Israeli war with Iran, with the currency also benefiting from the relative insulation provided by US energy independence.

Oil prices gained more than $2 a barrel on Wednesday after Iran said there was little reason to expect diplomatic progress with the US.

Iran had told Pakistan's army chief there would be no talks with Washington until its demands were met, Iranian media outlet Nournews reported on Tuesday, adding that a Qatari delegation had arrived in Tehran. There was no official confirmation of the reports.

Despite its safe-haven appeal, the dollar has come under pressure this month from falling Treasury yields as investors sought the relative safety of government bonds amid volatility in AI-related stocks ahead of major technology earnings. That reporting season got under way overnight with results from SpaceX SPCX.O.

"With equity market sentiment and the growth outlook closely tied to the performance of the major tech firms, their earnings results can have a large bearing on the USD," said Carol Kong, economist and currency strategist at Commonwealth Bank of Australia, in a client note.

The Australian dollar climbed to a three-week high and was last up 0.4% at $0.703. Reserve Bank of Australia Deputy Governor Andrew Hauser told a Citi conference that the inflation outlook looked "materially worse".

The New Zealand dollar inched 0.1% up to $0.569, while the Canadian dollar was broadly steady at C$1.404. Norway's crown extended gains to a seventh session, up 0.4% against the dollar.

Elsewhere, the Indonesian rupiah inched 0.1% lower after the country's central bank left its main interest rate unchanged for a fourth straight policy review, but hiked the deposit facility rate.