FOREX: Dollar in tight range as traders eye Middle East peace talks

The dollar traded in a narrow range on Tuesday as investors stayed on alert for signs of progress on a potential deal to reopen the Strait of Hormuz.

An agreement between the U.S. and Iran to open the crucial strait would ease pressure on currencies of oil-importing countries such as Japan and euro zone nations, while reducing safe-haven demand for the dollar.

U.S. President Donald Trump said on Monday that talks with Iran were ongoing. Oil prices were higher on Tuesday, and investors have treated news of progress around ending the U.S.-Israeli war on Iran with caution, citing the fragility of a ceasefire struck between Washington and Tehran in April and frequent assertions by Trump in recent weeks that an agreement is forthcoming.

The dollar index =USD, which measures the currency against six peers, was up 0.046% at 99.216. It has traded in a narrow range of about 98.9 to 99.5 since May 15. Despite the surge in energy prices, the U.S. economy has remained stable, though growth has slowed and job openings have increased.

"The dollar could gain momentum through the week if US-Iran negotiations remain inconclusive and Friday's non-farm payrolls report confirms continued resilience in the world's largest economy," said Karl Schamotta, chief market strategist at Corpay, in a research note.

The dollar jumped at the start of the Iran conflict on February 28, buoyed by safe-haven demand and the U.S. economy's relatively limited exposure to energy-driven inflation. It has given back some of those gains as uncertainty over the conflict's direction persists.

DATA IN FOCUS

Euro zone inflation data reinforced expectations for a quarter-point European Central Bank rate hike later this month, which markets had already widely priced in. Traders now are betting on two hikes by December and are putting about a 50% chance on a third increase. EURESTECBM5X6=ICAP

The euro EUR=EBSfell 0.03% to $1.1629.

"The pass-through of higher energy and input prices to final consumption will be limited due to a lack of ability and willingness of consumers to actually pay for these higher prices," said Carsten Brzeski, head of macro at ING.

U.S. data on Tuesday showed job openings rose to 7.618 million in April, ahead of Friday's closely watched monthly employment report.

Markets expect the Federal Reserve's next move will be a rate increase.

"The combination of loose U.S. financial conditions, reversing safe-haven support and the Fed sounding patient has kept the dollar in check," Paul Mackel, global head of forex research at HSBC, said.

YEN'S 160 PER DOLLAR MARK IN THE SPOTLIGHT

Japan's Finance Minister Satsuki Katayama said on Tuesday authorities are ready to respond in currency markets as needed, while refraining from comment on recent moves.

The yen JPY= was last weaker at 159.920 per dollar, near the 160 level widely seen as a trigger for intervention.

Markets are awaiting a speech by Bank of Japan Governor Kazuo Ueda on Wednesday for clues on whether the central bank will raise rates next week.

"Action remains likely, and even though inflation has eased, the risk of being behind the curve is rising," Derek Halpenny, head of research, global markets at MUFG, said.

Bitcoin was last down 5.8% at $67,213.42, lowest since April.

-Hannah Lang/Reuters