Despite rising tensions, US-Iran peace talks stretched into their second day in Switzerland under the terms of a memorandum of understanding reached last week to extend a ceasefire from April for at least another 60 days.

Chris Weston, head of research at Pepperstone, said it was not surprising how quickly adherence to the terms of the deal had broken down. "Ultimately, what matters to markets is the flow of cargo through the Strait of Hormuz."

Shipping data showed the number of ships that passed through the waterway fell sharply on Sunday after Tehran said it had closed the strait. That lifted oil prices with Brent crude futures climbing 1.30 percent to $81.62 a barrel.

"The physical market remains tight and that should provide some support, but flows in FX and commodities, particularly gold, will continue to be heavily influenced by developments in the energy complex," Weston said.

Sterling eased in early trading as traders assessed the political tumult in Britain, where Prime Minister Keir Starmer was considering his political future after rival Andy Burnham's decisive election victory to parliament.

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The pound was 0.24 percent weaker at $1.32055, while the euro softened 0.1 percent to $1.1462. The Australian dollar was last down 0.19 percent at $0.70035, while the New Zealand dollar last bought $0.573.

Markets will be focused on Burnham's views on fiscal policy and whether there will be any relaxation of the current fiscal rules, Commonwealth Bank of Australia strategists said.

"A loosening in fiscal rules would likely be poorly received by the UK bond market and weigh on pound," they said in a note.

The Japanese yen slipped to 161.53 per dollar, hovering near a two-year low reached last week. A break beyond 161.96 would take the yen to its weakest level since 1986.

Japanese Finance Minister Satsuki Katayama said on Monday that authorities were prepared to respond appropriately to currency moves at any time, reiterating their previous stance.

"The MOF may be getting sore necks watching USD/JPY surge into the 2024 high," said Matt Simpson, senior market analyst at StoneX. "Yet they may also feel powerless to do anything about it — as intervening against the tide of a hawkish Fed and strong US fundamentals could prove costly and futile."

The yen has erased gains made after a round of interventions from April 30, as a hawkish tilt by the Federal Reserve has led traders to ramp up bets on rate increases this year.

Treasuries remained under pressure on Monday with yields on 2-year notes rising to their highest since early 2025 at 4.2276 percent. Traders are anticipating 43 basis points of hikes this year with a 25 bp increase fully priced in by September.

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