Dollar retreats on report of US-Iran sanctions deal

By Karen Brettell

NEW YORK, May 18 (Reuters) - The dollar slipped against most major currencies on Monday as oil prices fell and 10-year U.S. Treasury yields withdrew from a 15-month high, after an Iranian news report indicated that the United States was set to waive sanctions on Iranian crude.

A separate report from Al Arabiya also said that Iran had agreed to a long-term nuclear freeze instead of a complete dismantling of its facilities.

The news reports sent oil prices lower and boosted other markets.

"Clearly that was the impetus this morning," said Lou Brien, market strategist at DRW Trading.

The euro was last up 0.15% at $1.1643 and sterling strengthened?0.53%?to $1.3389.

The dollar index, which tracks the U.S. currency against six others, dipped 0.17% to 99.10, having posted its strongest weekly performance in three months last week.

The dollar had been buoyed by energy disruptions in the Middle East, as the U.S. economy is better positioned to absorb higher costs than many of its peers.

RISK OF HIGHER INTEREST RATES

However, a global bond sell-off - which extended earlier on Monday before reversing - has also highlighted growing concerns that rising energy prices could push central banks toward higher interest rates.

"Although expectations regarding the Fed had shifted significantly towards a more restrictive monetary policy from the outset, market participants were still reluctant to bet on interest rate hikes. This changed last week, with expectations regarding the Fed shifting most markedly among the G10," said Commerzbank strategist Michael Pfister.

Some of the market moves are also likely due to investors testing whether Kevin Warsh, the newly appointed Federal Reserve Chair, will react to higher inflation if needed, said Brien. "They're going to want to see that Warsh is his own man rather than the President's man at the Fed."

Warsh has argued there is room to lower rates, though persistent inflation - driven in part by the war in the Middle East - could frustrate those hopes. Markets are pricing in a greater than 52% chance that the Fed will raise rates by January.

The Japanese yen weakened 0.05% to 158.86 against the U.S. dollar, its weakest since April 30.?

Japanese officials intervened several times in late April and into early May, which helped the yen to strengthen, though the currency has since surrendered much of those gains.

Japan's government is likely to issue debt as part of funding for a planned extra budget to try to limit the economic impact of the Middle East war, a government source with direct knowledge of the deliberations told Reuters on Monday.

(Additional reporting by Jiaxing Li in Hong Kong and Amanda Cooper in London; Editing by Susan Fenton, Chizu Nomiyama and Barbara Lewis)