Sterling slips as Iran strikes push up oil prices and boost dollar

LONDON, July 13 (Reuters) - The pound fell slightly on Monday as currency markets wavered in response to renewed hostilities between the U.S. and Iran, which pushed up oil prices and fanned inflation fears.

U.S. and Iranian forces exchanged heavy missile and drone attacks over the weekend and into Monday, with Tehran striking U.S. facilities in the region and saying it had again closed the Strait of Hormuz.

The U.S. military said it had struck Iranian air defence systems, coastal radar sites, and other sites. Oil prices rose, with Brent crude last up 2% at $77.60.

The U.S. dollar, which investors consider a safe haven in times of uncertainty, climbed against certain currencies including the pound.

Sterling, which is largely driven by the dollar, was last 0.1% lower at $1.339.

The euro rose 0.2% to 85.38 pence, after falling to its lowest in a year against the pound last week.

"The spill-over effects into the foreign exchange market remain relatively modest so far," said Lee Hardman, senior currency analyst at MUFG.

"A significantly higher price of oil has the potential to be a more powerful bullish catalyst for the U.S. dollar now that the Fed has indicated recently that it is considering raising rates in response to upside inflation risks."

Traders have increased their bets on U.S. Federal Reserve rate hikes, which has supported the dollar. 

Money markets were pricing in 37 basis points of monetary tightening from the Fed this year, versus 33 bps for the Bank of England.

The pound has remained relatively strong this year, however, as the UK economy has held up slightly better than expected.

Sterling has slipped 0.6% in 2026 versus the dollar compared to a 2.7% fall in the euro.

(Reporting by Harry Robertson; editing by Barbara Lewis)