Dollar holds firm ahead of US inflation data

The US dollar held largely steady against most major currencies on Tuesday as investors monitored geopolitical developments in the Middle East while awaiting key US inflation data.

The US Dollar Index was little changed at 99.84, while oil prices hovered near their highest levels in a week as hopes faded for an agreement between the United States and Iran to end the conflict in the Middle East.

The index, which measures the US currency against six major peers, traded broadly unchanged around 99.8 after hitting its lowest level since June 15 on Friday.

US inflation data in focus

The main event for currency markets this week is a series of US inflation-related data releases, prompting traders to remain cautious and keeping the dollar largely confined to a narrow trading range.

Wednesday's Consumer Price Index report could reveal the impact of the war with Iran on inflation. Producer Price Index data due Thursday and retail sales figures scheduled for Friday are expected to provide further clues about the inflation outlook.

Data released on Friday showed that the US economy unexpectedly lost jobs in July, while employment gains for the previous two months were sharply revised lower, reducing expectations that the Federal Reserve will raise interest rates next month.

The weak labor-market figures have increased the importance of Wednesday's CPI report as investors look for clues about the Federal Reserve's next policy move.

Analysts view the labor-market data as negative for the dollar, suggesting the currency could retain a bearish bias this week. However, a surprisingly strong CPI reading could prompt markets to once again price an interest-rate hike as the base-case scenario.

Market expectations for a September rate hike have fallen to around 44%, from 67% a week ago. US Treasury yields have also largely maintained their post-jobs-report declines as the weak data reduced bets on a rate increase, with the 10-year Treasury yield trading around 4.647%.

Core CPI is expected to rise 0.2% month-on-month in July, while the annual rate is forecast to slow to 2.5% from 2.6% in June.

Thursday's producer-price data and Friday's retail-sales figures will provide further indications about the inflation outlook.

Iran and Strait of Hormuz developments in focus

Investors continue to closely monitor negotiations aimed at reopening the Strait of Hormuz and their potential impact on energy prices.

Iran said an agreement with Oman to establish new shipping corridors is under discussion, but indicated that the United States still needs to meet additional conditions, adding to uncertainty surrounding energy supplies.