FOREX-Dollar drifts higher as Gulf tensions bolster safe-haven bid

* Euro, pound mark time ahead of ECB meet, UK PM vote
* Gulf crisis turns sentiment to risk-off
* Dollar breaks over 108 yen, dollar index edges higher

By Tom Westbrook
SYDNEY, July 22 (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 .DXY ,
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 EUR=D3 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. FEDWATCH
Earnings due this week from bellwether firms such as
Caterpillar Inc CAT.N and Amazon.com Inc AMZN.O 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 GBP=D3 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."