FOREX: Dollar dips as labor market remains stable, US-Iran tensions rise

NEW YORK — The U.S. dollar slipped for a second consecutive session on Thursday as renewed military exchanges between the United States and Iran weighed on investor sentiment, while signs of a resilient U.S. labor market kept attention on inflation and the Federal Reserve's interest rate outlook.

Iranian forces launched attacks on U.S. military facilities in neighboring Gulf states following U.S. strikes on Iran's southern coastal and eastern provinces, adding strain to a ceasefire agreement that had been in place for three weeks.

Oil prices retreated from earlier gains as investors assessed the risk of further escalation in the Middle East. U.S. crude fell 0.99% to $72.79 per barrel, while Brent crude declined 0.59% to $77.56 per barrel.

The U.S. dollar index, which measures the currency against a basket of major peers, slipped 0.09% to 100.93. The euro rose 0.17% to $1.1434.

"It's safe to say there's a lot of confusion," said Erik Bregar, director of foreign exchange and precious metals risk management at Silver Gold Bull in Toronto.

"You could argue the sideways price action means the market is trying to decipher reality, but we're going to trade based on the tone of the next headline," he said.

Minutes from the Federal Reserve's June 16–17 meeting, the first chaired by Kevin Warsh, showed policymakers were increasingly concerned about persistent inflation, with several participants seeing a case for raising interest rates immediately.

New York Federal Reserve President John Williams said he does not expect renewed fighting in the Middle East to result in a sustained increase in energy prices through the rest of the year.

Market expectations for a 25-basis-point interest rate increase at the Fed's July 28–29 meeting eased to 24.1%, down from 31% in the previous session but higher than 18.2% a week earlier, according to CME Group's FedWatch Tool. Traders are pricing in a 63.5% chance of a rate hike at the Sept. 15–16 meeting.

In Europe, accounts of the European Central Bank's latest policy meeting showed officials were presented with projections indicating inflation could remain above the central bank's target into next year despite higher interest rates.

Meanwhile, U.S. labor market data continued to show resilience. Initial jobless claims fell by 2,000 to 215,000 last week, below economists' expectations of 218,000, suggesting employment conditions remain stable.

Against the Japanese yen, the dollar weakened 0.15% to 162.31. The Bank of Japan said the conflict involving Iran could encourage more companies to raise prices later this year, reinforcing concerns over inflation that may support additional interest rate increases.

The British pound edged up 0.05% to $1.3391 after reaching a three-week high of $1.343 earlier in the session. -Reporting by Chuck Mikolajczak; addtional reporting by Amanda Cooper in London and Jiaxing Li in Hong Kong; Editing by Kate Mayberry, Chizu Nomiyama and Paul Simao/Reuters