Dollar rally pauses on Iran deal optimism, Aussie slides

By Kevin Buckland

TOKYO, May 21 (Reuters) - The U.S. dollar hovered below a six-week peak on Thursday after pulling back on rising hopes that Washington is nearing a deal with Tehran to end the war in the Middle East.

The Australian dollar declined following a surprise rise in the unemployment rate to the highest since 2021, which lessened the case for higher interest rates.

U.S. President Donald Trump said on Wednesday that negotiations were in the final stages, while also warning of further attacks if Iran does not agree to a deal.

The dollar, a traditional safe haven, was down slightly at 158.87 yen in early Thursday trading after falling for the first time in eight sessions against the yen the day before. That pulls it further away from the 160 level viewed as a potential trigger for official currency intervention.

Bank of Japan policy board member Junko Koeda added a measure of support for the yen with hawkish comments on Thursday, saying in a speech that the central bank needs to continue to raise rates with underlying inflation already around the 2% target.

The euro was steady at $1.1626 on Thursday, after dipping to the weakest since April 7 at $1.1583 in the previous session before bouncing back.

The dollar index, which measures the currency against the euro, yen and four other rivals, was flat at 99.14 after touching 99.472 on Wednesday, the strongest level since April 7.

"The 'safe haven' flows reversed because of positive news about the Iran war," Joseph Capurso, head of FX at Commonwealth Bank of Australia, wrote in a client note.

At the same time, "while the U.S. has domestic political incentives to seek peace, we would not be surprised if President Trump chooses military escalation to gain leverage in negotiations," he said.

Australia's dollar slid 0.5% to $0.7120.

Figures from the Australian Bureau of Statistics showed the jobless rate climbed to 4.5%, when analysts had looked for a steady 4.3%. Net employment fell 18,600 in April from March, when it rose a revised 23,300. That was far below market forecasts of a 15,000 gain.

Sterling was little changed at $1.3433.

Cryptocurrency bitcoin edged higher to around $77,818.

(Reporting by Kevin Buckland; Editing by Kim Coghill and Jacqueline Wong)