FOREX-Aussie dollar eases as RBA hikes rate; currencies drift on war uncertainty

(Updates market prices, comments after RBA decision)

By Jiaxing Li

HONG KONG, March 17 (Reuters) - The Australian dollar weakened on Tuesday after the country's central bank raised rates, though a close vote led traders to reduce bets on further tightening, while the U.S. dollar drifted as traders weighed developments in the Iran war.

As expected, the Reserve Bank of Australia raised its cash rate by 25 basis points to 4.1% as inflation re-accelerated, but the surprisingly tight vote caused the Aussie to slide 0.25% to $0.7053.

Five board members voted for the increase and four voted against, in the closest decision since the RBA started revealing the tallies.

There is a "material risk" that inflation will remain above target for longer than previously anticipated, with uncertainties in the Middle East possibly adding to global and domestic inflation, the RBA said in a statement.

The three-year government bond yields fell 7 basis points to 4.509%. Investors pared back the chance for another hike in May, which is now priced at around 30%.

The RBA kicks off a series of eight central bank conclaves this week that investors will parse to gauge policymakers' views on the war's impact on inflation and growth. Most, including the U.S. Federal Reserve, the Bank of England and the European Central Bank are expected to keep their policies unchanged.

"While the RBA has not ruled out another hike, it stated Middle East developments pose risks in both directions," said Prashant Newnaha, senior rates strategist at TD Securities.

"Overall the bank is now in wait and watch mode, but we see limited read through for other central banks from today's RBA decision."

The euro was recently steady at $1.1499, while sterling last fetched $1.33115, holding on to some of the sharp gains from the previous session. The dollar index was little changed at 99.894,but is up over 2% this month.

Sentiment turned jittery again after several American allies rebuffed U.S. President Donald Trump's request to send warships to escort oil tankers through the Strait of Hormuz, casting fresh doubts on hopes that energy exports can begin to normalize soon.

Surging oil prices due to the U.S. and Israel's war on Iran have made investors more worried about inflation, triggering a sharp repricing of rates outlooks across the globe. That has lifted the U.S. dollar against most currencies.

"The dollar is acting as the favoured geopolitical and rates safe haven and the backdrop has helped support the move," said Kieran Williams, head of Asia FX at InTouch Capital Markets.

Given the uncertainty of the Middle East situation, it seems likely that near-term strength can continue while the war risk and oil premium stay elevated, he said.

The Japanese yen weakened to 159.31 per dollar, just shy of the crucial 160 level, despite verbal warnings from Japanese authorities on Tuesday. Analysts expect the bar for an intervention to be higher because of rising oil prices.

The yen is down more than 2% against the dollar since the war broke out at the end of February.

Bank of Japan Governor Kazuo Ueda said underlying inflation is accelerating toward the bank's 2% target ahead of the central bank's two-day policy meeting that ends on Thursday. Its board is widely expected to keep interest rates steady. (Reporting by Ankur Banerjee in Singapore and Jiaxing Li in Hong Kong; Editing by Thomas Derpinghaus)