By Tom Westbrook
SYDNEY (Reuters) - The dollar drifted higher on Monday as investors tempered their expectations for deep U.S. interest rate cuts this month and heightened Middle East tensions supported safe-haven assets.
While currency-market focus will centre on global central bank decisions scheduled for the next two weeks, traders are also watching for developments in U.S.-China trade negotiations and Wall Street earnings.
The dollar broke above 108 yen to hit its highest since Wednesday, though that was still in the middle of the 107-109 range where it has traded for a month. The dollar index, was barely changed at 97.179 after gaining 0.35% last week.
"There's a lot of uncertainty creeping in to the market," said Nick Twidale, director at Sydney trade financier XChainge.
"I think we've seen a bit of safe-haven flows back into the dollar," he said, adding it could rise further if the Federal Reserve cuts interest rates by only 25 basis points, as expected.
Geopolitical fears were dominated by confrontation in the oil trade's most important waterway escalating, with footage showing the Iranian military defying a British warship when it seized a tanker in the Strait of Hormuz on Friday.
The euro held near critical chart support around $1.12, a break of which could lead to further losses.
On the policy front, markets generally expect central banks to either cut rates or keep settings accommodative, starting with the European Central Bank (ECB), which meets on Thursday followed by the Bank of Japan and then the Fed next week.
"The moment of truth is now around the corner as central banks will be forced to unveil their policy intentions," analysts at JPMorgan Chase & Co said in a note.
Pricing for a 50-basis-point Fed cut soared last week after a dovish speech by New York Fed President John Williams. Those expectations later tapered off after a Fed spokesman clarified that the remarks did not refer to "potential policy actions".
Priced-in forecasts for a 50-basis-point cut have tumbled from as high as 71% last week to 18.5% on Monday.
Earnings due this week from bellwether firms such as Caterpillar Inc and Amazon.com Inc will also be closely watched for clues on the health of U.S. economy.
In Asia, focus remains on China as Beijing and Washington seek to end a protracted trade war. A report over the weekend by China's Xinhua news agency suggested some local firms were seeking to buy U.S. farm products, a possible sign of progress.
Elsewhere, investors are waiting to see if Boris Johnson wins the British Conservative Party's leadership ballot. The pound held around $1.2502, staying on a slippery slope since mid-March as fears of a hard Brexit have gathered.
"We're likely to be marking time ahead of those big risk events later in the week," National Australia Bank FX Strategist Rodrigo Catril said. "The market is still licking its wounds post Fed Williams' backtracking."
(Reporting by Tom Westbrook; Editing by Sam Holmes)