Dollar gains as US-Iran war gauged; sterling eases as Burnham steps in

By Chuck Mikolajczak

NEW YORK, July 20 (Reuters) - The dollar rose on Monday as investors weighed contradictory developments in the Iran war, while the pound fell from earlier levels as markets prepared for new British Prime Minister Andy Burnham.

Yemen's Iran-aligned Houthis said they were imposing a naval blockade on Saudi Arabia, a move that opens a new front against the United States in its war on Iran and widens the threat to global energy supplies and trade beyond the Gulf.

But crude prices came off their initial move higher as Iran and the United States signaled they wanted to resume diplomacy.

U.S. crude advanced 0.22% to $82.67 a barrel and Brent rose to $88.78 per barrel, up 0.77% on the day, after earlier hitting their highest levels in more than a month.

The dollar index, which measures the greenback against a basket of currencies, climbed 0.18% to 100.92, with the euro down 0.19% at $1.1417.

"There's a lot of conflicting news coming from the Middle East — on one hand, it looks like it could be escalating, on the other hand, it looks like there's another ... last-ditch effort to try to like get a new ceasefire and that's why oil came off," said Marc Chandler, chief market strategist at Bannockburn Capital Markets in New York.

The economic calendar for the week is light, and Federal Reserve officials are in a "blackout period" of public comments ahead of the central bank's meeting next week.

Recent reports on U.S. inflation and the labor market have caused markets to sharply curb expectations for a rate hike from the Fed next week, pricing in only a 16.6% chance for an increase, according to CME FedWatch, down from more than 40% a week ago. Expectations for a hike at the September meeting are at 62.8%, however.

A bevy of Fed officials, including Chairman Kevin Warsh, have flagged concerns about inflation pressures in recent weeks while noting the labor market remains stable.

The European Central Bank (ECB) will hold a policy meeting later this week, with markets pricing in only a 13.1% chance of a hike, according to LSEG data, with a 78% chance for an increase at its September meeting.

The ECB is seen as being more likely to be aggressive in raising rates than the Fed due to the sensitivity to energy prices in the region and its single mandate of price stability.

UK CHANCELLOR CHOICE IN FOCUS

Sterling weakened 0.12% to $1.3437 after climbing to $1.3481 as Burnham took over from Keir Starmer, becoming Britain's seventh Prime Minister in a decade as he pledged to reshape the country's politics and deliver a new economic model.

The pound pared declines after Burnham named John Healey as finance minister from a session low of $1.341.

UK assets last week were supported by reports that the job would likely go to Shabana Mahmood, widely regarded as a centrist, rather than a more left-leaning candidate.

"Markets have delivered their first verdict on Andy Burnham, which is cautious optimism. Investors appear comfortable with the idea of a more active government, but only if it can deliver faster economic growth without stretching the public finances," said Lale Akoner, global market strategist at eToro.

Elsewhere, the U.S. dollar was down 0.14% at 6.769 against the Chinese yuan in offshore trade after China kept its benchmark lending rates unchanged for a 14th consecutive month on Monday, in line with market expectations.

Against the yen, the dollar edged up 0.03% to 162.46 in thin liquidity as Japan observed the Marine Day holiday.

(Reporting by Chuck Mikolajczak, additional reporting by Sophie Kiderlin in London and Gregor Stuart Hunter in Singapore; Editing by Jamie Freed, Andrei Khalip, Andrew Heavens, Will Dunham and Susan Fenton)