FOREX: Dollar hovers around two-month high as Iran-Israel truce hangs in balance

HONG KONG — The U.S. dollar hovered near a two-month high on Tuesday, strengthening against most major currencies as renewed geopolitical uncertainty in the Middle East weighed on risk sentiment and traders increased bets on a Federal Reserve interest rate hike later this year.

Iran and Israel paused hostilities on Monday following an appeal from U.S. President Donald Trump. However, tensions remained elevated after Tehran warned it could resume attacks if Israel continues strikes against Iran-linked Hezbollah targets in Lebanon. The fragile situation has kept energy markets on edge and supported demand for safe-haven assets, including the U.S. dollar.

Efforts by the United States to secure a more durable agreement with Iran to end the prolonged conflict have made limited progress. The lack of a breakthrough has helped keep oil prices elevated, further reinforcing the dollar’s appeal as investors seek stability amid global uncertainty.

In currency markets, the euro stood at $1.1528 while the British pound traded at $1.3335, both edging lower in Asian trading after touching two-month lows in the previous session. The Australian dollar slipped 0.1% to $0.7039, while the New Zealand dollar changed hands at $0.5804.

The Japanese yen weakened to as low as 160.295 per dollar, continuing to hover near levels widely viewed by traders as a potential threshold for government intervention. Meanwhile, the dollar index, which tracks the greenback against a basket of major currencies including the euro and yen, was steady at 100.03, just below Monday’s two-month peak of 100.21.

Market participants are closely watching upcoming U.S. inflation data scheduled for release on Wednesday, which could provide further direction for Federal Reserve policy expectations. Stronger-than-expected employment figures last week have already boosted bets on a possible rate hike before the end of the year, with futures pricing in roughly a 70% chance of such a move, according to market data.

U.S. Treasury yields remain elevated amid these expectations. The two-year yield hovered near a 15-month high, while the benchmark 10-year yield stayed firmly above 4.5%. Analysts warn that persistently strong economic data could reinforce inflation concerns and increase pressure on policymakers to maintain a tighter stance.

Analysts noted that any upside surprise in inflation could further strengthen the dollar while weighing on equity markets. Investors are also looking ahead to European Central Bank policy decisions this week, with markets expecting another rate increase as the bank attempts to balance persistent inflation pressures against signs of slowing economic growth. -Reporting by Jiaxing Li in Hong KongEditing by Shri Navaratnam/Reuters