The U.S. dollar rose on Tuesday as investors balanced cautious hopes for a Middle East peace deal against concerns that the Federal Reserve could raise rates to curb energy-driven inflation.
U.S. President Donald Trump said on Monday there was now a "very good chance" of reaching a deal limiting Iran's nuclear program.
The dollar jumped in March after Iran's effective closure of the Strait of Hormuz pushed oil prices higher, weighing on oil-dependent economies such as Japan and the euro area while increasing safe-haven demand for the greenback.
Oil prices fell 2% on Tuesday after Trump's remarks. "There are reasons why the dollar has not strengthened back to the levels seen in March,” Paul Mackel, global head of forex research at HSBC, said.
"Notably, global risk sentiment has recovered strongly; tension remains in USD OIS (overnight index swaps) markets which have stopped short of pricing an aggressive Fed hiking cycle; and monthly global growth momentum is still positive," he added.
At the same time, investors are now pricing in almost a 48.5% chance that the Fed could raise rates in December, and a 98.8% chance it maintains current rates at its next meeting in June, according to the CME FedWatch tool.
"Even if the Fed moves to signal that it will adopt a neutral bias in June, it may not be enough to stabilize inflation expectations and long-term U.S. Treasury yields," said Thierry Wizman, Macquarie Group’s global foreign exchange and rates strategist.
"An opportunity to change the Fed's rhetoric decidedly toward 'hawkish' will come with the small flurry of Fed speeches, between now and June 6," he added. The U.S. dollar index, which measures the greenback's strength against a basket of six currencies, was up 0.2% at 99.18, after snapping a five-day winning streak on Monday as fears eased of an escalation in the war.
The euro was down 0.2% at $1.1633.
YEN NEAR INTERVENTION ZONE
Against the yen, the U.S. dollar was up 0.15% at 159.10 yen after government data showed on Tuesday that Japan's economy grew by an annualised 2.1% in the first quarter, supporting expectations for a Bank of Japan rate hike in June.
Japanese Finance Minister Satsuki Katayama told reporters on Monday that Japan stands ready to act against excessive foreign exchange volatility, while ensuring that any intervention to support the yen and sell dollars is conducted in a way that avoids pushing up U.S. Treasury yields.
Investors have been on watch for further signs of intervention to support the yen, which is a little stronger than it was before Japanese officials last month began their first foray into the market in almost two years.
The Australian dollar was down 0.5% at $0.71345 after the release of minutes from the Reserve Bank of Australia's meeting on May 5.
The kiwi slipped 0.4% to $0.5854 in sympathy with the Aussie.
Against the Chinese yuan, the U.S. dollar was up 0.1% at 6.8031 yuan in offshore trade. - Reuters
