U.S. dollar down as Iran news, positioning weigh

An employee counts U.S. dollar notes at a money changer in Jakarta January 27, 2010.

NEW YORK (Reuters) - The dollar sank on Wednesday as news Iranian warships were en route to Syria rekindled geopolitical tensions in the Middle East, sparking a spike in oil and a surge in traditional safe-haven currencies such as the Swiss franc.

Technical factors and market positioning also weighed on the dollar, especially against the euro, as investors holding short euros got squeezed when the greenback fell and crude oil rose. The dollar's losses, however, should prove short-lived, some analysts said, with the currency supported by a recent spate of positive U.S. economic data.

"The Iran story is certainly escalating the geopolitical risk," said Greg Salvaggio, senior vice president of capital markets at Tempus Consulting in Washington.

Israel's foreign minister said moves by two Iranian war ships to sail through the Suez canal to Syria were a "provocation" by Tehran.

"We got a move away from the dollar because oil prices went up after the Iranian news. But we think this is just a short-term push up in the euro versus the dollar. We love the U.S. data this morning."

In general, the greenback tends to fall when oil prices, which are denominated in dollars, rise because it becomes cheaper for overseas investors holding foreign currencies to buy crude oil.

Brent oil prices surged to near 2-1/2-year highs on the Iran news.

In late afternoon trading, the euro rose 0.5 percent against the dollar to $1.3562, its second consecutive daily gain. Investors short the euro tried to push the currency below $1.3480, the roughly 38.2 percent Fibonacci retracement of the euro's January to February rally.

The euro got as low as $1.3462 on electronic trading platform EBS in the wake of Wednesday's positive U.S. data, but it quickly rebounded on short-covering.

The Swiss franc, a traditional safe-haven, especially during times of geopolitical turmoil, rose, pushing the dollar down 0.8 percent to 0.9597 francs. It soared nearly 1 percent after the news broke.

The franc has risen against the dollar for three straight sessions and has gained roughly 2.5 percent so far.

The Swiss currency also edged up against the euro, which slipped 0.2 percent to 1.3016 francs. On the month, the euro was still up 0.7 percent.

Meanwhile, the dollar's nearly two-week rally against the yen came to a halt, with earlier gains erased as U.S. Treasury yields fell on the Middle East news. U.S. inflation and housing data sent Treasury yields higher early in the session.

The dollar has outperformed the yen in nine of the past 11 sessions as U.S. Treasury yields factored in inflation. In late afternoon New York trading, the dollar was down 0.1 percent at 83.67.

The Federal Reserve on Wednesday released the minutes of its last meeting and echoed Fed Chairman Ben Bernanke's testimony to the House of Representatives last week. The U.S. central bank was optimistic about prospects for the economy, but it was not bullish enough for markets to change its expectations that the Fed's debt purchases, known as quantitative easing, will last until June.

The dollar showed little reaction after the Fed minutes, although the comments added to the greenback's generally positive tone this month.

Sterling fell sharply as investors revised expectations for a rate rise after the Bank of England downgraded its economic growth forecast in its quarterly inflation report, even as consumer prices spiked higher.

Sterling fell to the day's low of $1.5987, compared with around $1.6140 before the Bank of England's quarterly report on inflation was released. It was last at $1.6083, down 0.2 percent.

(Additional reporting by Julie Haviv; Editing by Dan Grebler)