The US dollar traded near its highest level in two months on Thursday as renewed conflict in the Gulf region weighed on risk appetite, while investors remained alert to the possibility of Japanese intervention as the yen hovered near the key 160-per-dollar level.

Renewed attacks

Iranian attacks on Kuwait on Wednesday damaged Kuwait International Airport and left dozens injured, while the US military carried out strikes near the Strait of Hormuz, further complicating prospects for a diplomatic resolution to the conflict.

Although Israel and Lebanon reached a ceasefire agreement, a broader peace deal remains elusive, keeping oil prices elevated and supporting demand for the US dollar as a safe-haven asset.

The euro rose 0.1% to $1.161, while a Reuters poll showed the European Central Bank is expected to raise its deposit rate to 2.25% on June 11 in an effort to contain inflation. The British pound also gained 0.1% to $1.343.

The US Dollar Index, which measures the greenback against a basket of major currencies, was little changed at 99.46, remaining close to the two-month high of 99.56 reached in the previous session.

Francesco Pesole, currency strategist at ING, said it is difficult to argue against the dollars strength at the moment.

He added that economic data continue to portray a resilient US economy, while the latest exchange of military strikes between the United States and Iran has pushed global markets toward a risk-off stance.

The Australian dollar, which is sensitive to risk sentiment, was steady at $0.713 after data showed Australias goods trade balance returned to surplus in April.

Economic data

On the economic front, a survey released Wednesday showed that the prices-paid component of the US services sector jumped to its highest level in nearly four years last month, reinforcing expectations that the Federal Reserve may keep interest rates unchanged until next year.

The yen and intervention risks

The Japanese yen traded at 159.89 per dollar, recovering from Wednesdays low after briefly breaking above the 160 level for the first time since April 30, prompting verbal warnings from Japanese officials.

The 160 level is widely viewed by markets as a red line that could trigger official intervention to support the Japanese currency.

Meanwhile, Bank of Japan Governor Kazuo Ueda strengthened expectations of a June rate hike through a noticeably more hawkish tone on inflation. Rising energy costs linked to the Iran conflict have increased upside inflation risks and opened the door to more frequent increases in borrowing costs.

Naohiko Baba, Head of Japan Research and Chief Japan Economist at Barclays, wrote that the central banks hawkish stance has become more pronounced, including explicit concern about the risk of falling behind the inflation curve, while maintaining the banks expectation of a rate hike in June.