LONDON/TOKYO, April 14 (Reuters) - The safe-haven dollar eased Tuesday and was headed toward a seventh straight daily decline as investors hoped for a diplomatic breakthrough in the Middle East even as the U.S. military began a blockade of Iran's ports.
The dollar index , which measures the dollar against a basket of six currencies, was last down 0.28% at 98.061, trading around its weakest since March 2, the first trading day after the U.S.-Israeli war with Iran began.
A seven-day losing streak for the index would be its longest since December, when investors were positioning for a year of U.S. interest rate cuts and a broad softening for the world's reserve currency.
Negotiating teams from the U.S. and Iran could return to Islamabad later this week, five sources said on Tuesday, after the highest-level talks between the two countries in decades ended at the weekend without a breakthrough.
U.S. President Donald Trump said Iran had been in touch on Monday and wanted to make a deal but that he would not sanction any agreement allowing Tehran to have a nuclear weapon.
BLOCKADE OF IRAN'S PORTS ADDS TO STRAIT OF HORMUZ DISRUPTION
The U.S. military's blockade of Iran's ports meanwhile angered Tehran and added to uncertainty about the reopening of the Strait of Hormuz.
The closure of the narrow strait, used for shipping much of the world's oil and gas, has propelled dollar-denominated oil prices higher, which has underpinned dollar moves.
Nick Rees, head of macro research at Monex Europe, said risk was foremost for investors.
"Markets are, on the one hand, deeply insensitive to a lot of data that would otherwise trigger bigger moves, and on the other hand, much more sensitive to rumours coming out of the Middle East when it comes to the potential for resolution or not," he said.
The euro was last up 0.35% against the dollar at $1.1798, while sterling rose 0.46% against the dollar to $1.3564 and was trading back at pre-war levels.
Elsewhere, the dollar weakened around 0.4% against the Japanese yen at 158.75 yen.
The yen remains vulnerable to selling pressure on concerns that the nation's trade balance will deteriorate and the rising risk that crude oil prices stay elevated, Keiichi Iguchi, senior strategist at Resona Holdings, said.
The chance of a rate hike this month by the Bank of Japan, once seen as a strong possibility, has receded as the war keeps markets volatile and muddies the economic outlook, .
"We're very much of the view that if the BOJ decides to stand pat at the end of April, then the risks are that the dollar-yen exchange rate is going to punch up through 160 (yen per dollar)," said Ray Attrill, head of forex strategy at National Australia Bank, in a podcast.
For markets, 160 yen per dollar is a red line that raises the risks of currency intervention.
Reporting by Sophie Kiderlin in London and Satoshi Sugiyama in Tokyo; Editing by Shri Navaratnam, Kevin Buckland, Barbara Lewis and Chizu Nomiyama
