FOREX-Dollar set for steepest weekly gain in a year as Iran crisis boosts haven demand

* Middle East conflict stokes demand for the safest assets

* Oil surge raises inflation risks, affects central bank policies

* Fed rate cut bets pushed out, wagers rise for ECB hike this year (Updates prices, adds analyst, BOJ, ADP comments in 10th-13th paragraphs.)

By Rocky Swift

TOKYO, March 6 (Reuters) - The U.S. dollar held broadly steady in Asian trade on Friday and was poised for its steepest weekly gain in more than a year as the escalating conflict in the Middle East drove demand for safe-haven assets.

The euro and yen remained on the back foot as the crisis drove oil prices ever higher, spurring inflation risks in economies dependent on energy imports and upending policy expectations for the Federal Reserve and other central banks.

Earlier hopes for a de-escalation gave way to fresh uncertainty, with Iran warning that Washington would "bitterly regret" the sinking of an Iranian warship. U.S. President Donald Trump said he wanted to be involved in choosing Iran's next head of state after U.S. and Israeli air strikes killed Supreme Leader Ali Khamenei in the early moments of the war.

"If the Middle Eastern conflict continues at its current intensity, it's likely to bring sustained higher inflation, a stronger U.S. dollar, and a vastly reduced chance of Fed rate cuts," IG market analyst Tony Sycamore wrote in a note.

The dollar index, which measures the greenback against a basket of currencies, was trading a touch lower at 99.03, still on course for a 1.4% gain this week that would be the most since November 2024.

The euro was little changed at $1.161 and set for a 1.7% slide this week. The yen fell 0.2% to 157.83 per dollar. Sterling nudged up 0.02% to $1.3358.

The war intensified on Thursday, with U.S. and Israeli jets hitting areas across Iran, and Gulf cities coming under renewed bombardment.

In a phone interview with Reuters, Trump said Mojtaba Khamenei, a son of the late supreme leader who has been considered a favorite to succeed his father, was an unlikely choice.

The greenback was one of a handful of winners in a volatile few sessions that have dragged stocks, bonds and, at times, even safe-haven precious metals lower.

"Broadly speaking, we are seeing most clients reduce risk across both G10 and EM currencies," said Nathan Swami, head of FX trading for Japan, Asia North and Australia at Citi in Singapore.

"When the conflict started over the weekend, we saw hedgers and custodians buy dollars in many of the onshore markets. Central bank support has kept Asian FX markets in check for now, but we think more depreciation pressure will build up the longer the conflict lasts."

Bank of Japan Deputy Governor Ryozo Himino said in parliament that the weak yen was pushing up import costs and may affect underlying inflation.

If the Middle East conflict and closure of the Strait of Hormuz last only about a month, the impact on growth in developing Asia would be modest, said Albert Park, chief economist for the Asian Development Bank. The spike in energy prices from the Middle East war has stoked fears of a resurgence in inflation, with overnight index swaps (OIS) showing shifts in rate outlooks for major central banks.

Traders have pushed back the time frame for the next easing by the Fed to either September or October, according to LSEG estimates. Rate-easing expectations from the Bank of England have also been pared back, while money markets increased bets on European Central Bank rate hikes as early as this year.

"The fears of what happened to inflation when the Russia-Ukraine war began and what we saw post-pandemic with supply shocks, that's still sort of front of mind," Skye Masters, head of markets research at National Australia Bank, said on a podcast. "You see that repricing in OIS (overnight index swap) curves, and you are seeing some meaningful repricing in bond markets as well."

With the war firmly front of mind, currency traders shrugged off economic data.

U.S. figures on Thursday showed the number of Americans filing new applications for unemployment benefits was unchanged last week, while layoffs dropped sharply in February, consistent with stable labor market conditions.

The market is now focused on Friday's employment report. Nonfarm payrolls likely increased by 59,000 jobs last month after a 130,000 rise seen in January, a Reuters survey of economists predicted. The unemployment rate is expected to have held steady at 4.3%.

The Australian dollar strengthened 0.36% versus the greenback to $0.7031, as New Zealand's kiwi rose 0.17% to $0.5904.

In cryptocurrencies, bitcoin fell 0.93% to $70,482.16, and ether declined 0.57% to $2,068.58. (Reporting by Rocky Swift; Editing by Shri Navaratnam and Kevin Buckland)