HONG KONG, March 17 (Reuters) - The U.S. dollar drifted

on Tuesday as traders weighed developments in the Iran war,

while the Australian dollar eased slightly ahead of an expected

rate hike from the country's central bank later in the day.

The euro was 0.12% lower at $1.1492 in Asian trading,

while sterling was also down 0.1% at $1.33, pulling back

the sharp gains from the previous session. The dollar index

was little changed at 99.913.

Sentiment turned jittery again after several American allies

rebuffed U.S. President Donald Trump's request to send warships

to escort oil tankers through the Strait of Hormuz, casting

fresh doubts on hopes that energy exports can begin to normalize

soon.

Surging oil prices due to the U.S. and Israel's war on Iran

have made investors more worried about inflation, triggering a

sharp repricing of rates outlooks across the globe. That has

lifted the U.S. dollar against most currencies.

Attention now shifts to the Reserve Bank of Australia

meeting later in the Asia-Pacific session, with markets now

pricing in a roughly 78% chance of a 25-basis-point hike.

The Australian dollar fetched $0.706, down 0.16%,

while the New Zealand dollar was down 0.24% at $0.5848.

"The policy response to the crisis will begin to crystallise

in the coming days" with market pricing shifting to reflect

either imminent hikes or at least less easing than what was

expected prior to the crisis, said Kyle Rodda, a senior analyst

at capital.com.

Policy uncertainty has risen too and there will likely be

division among central bankers about whether policy should react

to the supply shock or look past it, he added.

The RBA meeting kicks off a series of central bank conclaves

this week that investors will parse to gauge policymakers' views

on the war's impact on inflation and growth.

The Japanese yen weakened to 159.35 per dollar, just

shy of the crucial 160 level, despite verbal warnings from

Japanese authorities on Tuesday. Analysts expect the bar for an

intervention to be higher because of rising oil prices.

The yen is down more than 2% against the dollar since the

war broke out at the end of February.

"While the sharp rise in the oil price is helping drive a

bid for USDs, the yen is coming under pressure simply because

high oil prices and Japan's heavy reliance on energy imports

risks stoking inflation and a significant deterioration in its

trade balance," said Prashant Newnaha, senior rates strategist

at TD Securities.

"At some point authorities will need to determine whether to

protect the yen or the bond market. They can't have both."