The U.S. dollar climbed to one-week highs against major currencies on Monday before paring some gains, as renewed U.S.-Iran tensions and fading hopes for a Middle East peace deal drove investors toward safe-haven assets.

The United States stated on Sunday that it had seized an Iranian cargo ship that attempted to break the blockade, while Iran announced it would retaliate, sparking fears of a resumption of hostilities.

Tehran also announced it would not participate in a second round of negotiations that the U.S. had hoped to launch before the expiration of the two-week ceasefire with Iran on Tuesday.

Charu Chanana, head of investment strategy at Saxo, said:

"The weekend escalation revives the geopolitical risk premium just as markets were starting to price in peace gains," adding that the rise in oil prices "is not just an energy story, it is also a growth and interest rate story."

In latest trading, the euro fell 0.05% to $1.1754, after hitting a one-week low of $1.1729 earlier in the session, while the British pound declined 0.15% to $1.3497. The risk-sensitive Australian dollar also dropped 0.3% to $0.7145.

The dollar index, which measures the U.S. currency against a basket of six peers, rose to a one-week high of 98.47 before retreating to 98.34.

The index remains down 1.55% during April, after having jumped 2.3% in March driven by safe-haven demand following the outbreak of the war.

Analysts noted that the relatively limited movements in the currency market, with the dollar retreating from some of its early gains, suggest some remaining optimism that a solution is still possible despite the weekend setbacks.

Chris Weston, head of research at Pepperstone, said:

"While the market tone leans toward risk aversion at the start of the week, the moves so far appear orderly and not indicative of a major volatility shock."

He added: "Market participants realize the path toward a formal agreement will not be linear and will remain subject to sudden changes, so a shift in sentiment would not be entirely surprising."

Markets focus on the Strait of Hormuz

The war has entered its eighth week and has caused the most severe energy supply shock in history, leading to rising oil prices as a result of the effective closure of the Strait of Hormuz, through which about one-fifth of global oil supplies typically pass.

The United States continues to impose a blockade on Iranian ports, while Iran has lifted and then reimposed its blockade on maritime traffic through this vital waterway.

This led to a rebound in oil prices on Monday, with Brent crude contracts jumping by more than 6% to $95.92 per barrel, while U.S. West Texas Intermediate (WTI) rose to $89.29 per barrel, a 6.5% increase.

Nick Twidale, chief market strategist at ATFX Global in Sydney, said:

"The Strait of Hormuz remains the fundamental factor for many, and hopes for the U.S. and Iran sitting at the negotiating table before the ceasefire expires now seem remote."

He added: "For now, I believe we will see further declines in risk assets in the coming sessions."

Japanese yen under pressure

The Japanese yen declined to 158.96 per dollar, although it remains below the critical 160 level that traders fear could prompt authorities to intervene to support the currency.