The US Dollar pulled back on Tuesday after reaching a two-month peak, surrendering earlier advances against major currencies as concerns over Middle East tensions eased.
However, market movements remained subdued as investors awaited potential interest rate increases in both the United States and Europe.
Iran and Israel suspended their exchanges of attacks on Monday following a call for restraint from US President Donald Trump. Despite the pause, tensions remained elevated, with Tehran warning that it could restart military action if Israel continued targeting the Iran-backed Hezbollah group in Lebanon.
Trump said he could have an “idea” for an Iran agreement within the next few days, boosting investor optimism that a diplomatic breakthrough may be near.
Yet earlier attempts to secure a durable agreement to end the conflict, which has lasted for more than three months, have achieved limited progress. The lack of a lasting resolution has kept oil prices elevated and continued to support the US Dollar as investors sought safe-haven assets amid uncertainty.
The Euro rose 0.1% to $1.1545, rebounding after falling to a two-month low in the previous session. Meanwhile, the British Pound gained around 0.2% to $1.3360, recovering from its weakest level in three weeks, Reuters news agency reports.
Among risk-sensitive currencies, the Australian Dollar advanced 0.2% to $0.7056, while the New Zealand Dollar climbed 0.4% to $0.5833.
The Japanese Yen slipped to as low as 160.295 per Dollar, remaining near the 160 threshold that many market participants view as a potential trigger point for intervention by Japanese authorities to support the currency.
Moreover, the Dollar index, which tracks the currency’s performance against a basket of major currencies, edged down 0.1% to 99.9. The decline followed Monday’s climb to a two-month high of 100.21.
Elsewhere, the Chinese Yuan edged higher to 6.7756 per Dollar after data released on Tuesday showed that China's exports grew at a faster pace in May.
Markets are now fully pricing in a 25-basis-point rate increase by the European Central Bank at Thursday’s meeting, which would lift the key rate to 2.25%. Traders also expect the ECB’s benchmark rate could rise further to around 2.5% or 2.75% by the end of the year.
In addition, attention is turning to US inflation data due on Wednesday, as investors look for signals about the Federal Reserve’s policy path. Expectations for tighter policy have increased following a stronger-than-expected jobs report last week, which boosted bets on additional rate hikes later this year.
Fed funds futures markets now assign roughly a 70% probability of a rate hike by December, according to CME FedWatch data.
US Treasury yields stayed elevated amid expectations of tighter monetary policy, with the 2-year yield holding near a 15-month high, whereas the benchmark 10-year yield also remained firmly above 4.5%.