The US dollar edged lower on Tuesday as investors balanced escalating tensions in the Middle East against optimism fueled by softer-than-expected US inflation data released last week.

The euro rose 0.09% against the dollar to $1.1424, while the Japanese yen slipped 0.09% to 162.63 per dollar.

The mixed moves reflected growing uncertainty across financial markets as investors struggled to assess the economic impact of rapidly evolving developments in the Middle East.

Geopolitical tensions support the dollar, diplomacy limits gains

The US military carried out a tenth consecutive night of airstrikes against Iran, reviving geopolitical concerns and prompting investors to scale back bets on a near-term end to the conflict, a backdrop that typically supports demand for safe-haven assets such as the US dollar.

At the same time, diplomatic efforts continued. A senior Iranian official told Reuters on Monday that Tehran had received, through mediators, a proposal for a 10-day ceasefire.

The lack of clarity over the direction of the conflict has left the dollar trading in a narrow range, with investors reluctant to take large positions.

Inflation and oil prices cloud the outlook

Uncertainty over inflation also kept investors cautious after softer-than-expected US inflation data last week reduced expectations for additional Federal Reserve rate hikes, limiting support for the dollar.

However, the inflation outlook remains uncertain and will depend largely on when shipping through the Strait of Hormuz returns to normal and oil markets stabilize.

According to LSEG data, traders continue to expect at least one additional Federal Reserve rate hike this year.

Brent crude futures fell 1.1% on Tuesday but remained about 21% higher since the beginning of the month.

"We think any sustained weakness in the US dollar is more likely to be a 2027 story," said Jimmy Jean, Chief Economist and Strategist at Desjardins. "We expect the dollar to remain relatively strong over the coming months until the inflation outlook becomes clearer."

The US Dollar Index, which measures the greenback against a basket of six major currencies, slipped 0.05% to 100.9 after reaching its highest level since July 15 in the previous session.

Canadian dollar steadies after new US tariffs

The Canadian dollar stabilized after falling to a one-month low following Washington's decision to impose new 50% tariffs on a broad range of Canadian products in response to what the United States described as discriminatory treatment of US automobiles, alcoholic beverages, and dairy products.

Sterling rebounds as UK enters new political chapter

The British pound rose 0.1% to $1.3441, snapping a three-session losing streak.

The move came after Andy Burnham became the UK's new prime minister, the country's seventh leader in a decade, while pledging to maintain the fiscal discipline framework established by the previous government.

Former Defence Secretary John Healey was also appointed Chancellor of the Exchequer.

Burnham has yet to provide details on how he intends to achieve his economic objectives while honoring his election pledge not to raise taxes on working people.

"The key near-term risks remain the UK's fiscal position and Burnham's commitment to the fiscal rules adopted by the previous government," said Shaun Osborne, Chief FX Strategist at Scotiabank.

Meanwhile, investors are looking ahead to the European Central Bank's policy meeting later this week. Economists surveyed by Reuters expect the ECB to leave interest rates unchanged while signaling that at least one additional rate hike remains possible before the end of the year.

Gold prices rose in European trading on Tuesday, resuming their recovery from recent lows and reaching a one-week high, supported by a weaker US dollar and a pause in the rally in global oil prices.

The gains came amid growing hopes that diplomatic efforts could ease military tensions between the United States and Iran, potentially reducing the risk of a further surge in oil prices and the resulting inflationary pressures on global central banks.

The Price

• Gold prices rose 1.9% to $4,084.23 an ounce, their highest level since July 14, after opening the session at $4,008.06. Prices touched an intraday low of $3,999.89.

• Gold settled 0.25% lower on Monday after gaining more than 1% on Friday as part of a recovery from a two-week low of $3,959.72 an ounce.

US dollar

The US Dollar Index fell 0.15% on Tuesday, heading for its first decline in four sessions and reflecting broad weakness in the US currency against a basket of major peers.

The decline came as demand for the dollar as a safe-haven asset slowed, supported by improving investor sentiment and stronger risk appetite amid growing expectations that diplomatic efforts could contain the military escalation between the United States and Iran.

Oil prices

Global oil prices fell more than 0.5% on Tuesday, retreating from six-week highs amid profit-taking and growing hopes that diplomatic efforts could ease tensions around the Strait of Hormuz and ensure the continued flow of oil shipments through the vital waterway.

Iran conflict update

• The US military announced a new round of airstrikes against Iranian military targets, marking the tenth consecutive day of operations.

• The strikes targeted command centers, missile launch sites, drone facilities, and air defense systems as part of Washington's efforts to reduce Iran's ability to threaten shipping through the Strait of Hormuz.

• Iran said it would continue its military response, with reports indicating attacks on US military bases and facilities across the region.

• US President Donald Trump said: "Every time Iran kills an American soldier, it will pay many times over."

• International mediators submitted a formal proposal to Tehran calling for a 10-day ceasefire in an effort to revive the previously agreed temporary accord and reduce military tensions.

• Iran's Foreign Ministry confirmed that indirect contacts and exchanges of messages and proposals with Washington through mediators remain ongoing despite the continued airstrikes.

US interest rates

• Cleveland Federal Reserve President Beth Hammack joined a growing number of policymakers arguing that further interest rate increases may be necessary to curb persistent inflation.

• According to CME Group's FedWatch Tool, markets are pricing in an 84% probability that the Federal Reserve will leave interest rates unchanged at its July meeting and a 16% chance of a 25-basis-point increase.

• For the December meeting, markets are pricing in an 18% probability that rates will remain unchanged and an 82% chance of a 25-basis-point increase.

• Investors are closely monitoring upcoming US economic data to further refine expectations for the Federal Reserve's policy path.

Gold outlook

Financial markets strategist Ilya Spivak said gold appeared to be establishing a price floor around $4,000 an ounce and would likely attempt to resume its advance from that level.

Spivak added that developments in the Middle East still appeared to be influencing gold prices, although the market's attention to the news had become increasingly brief.

SPDR Gold Trust

Gold holdings at the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, increased by 4.57 metric tons on Monday to 1,003.59 tons.

That marked a rebound from 999.02 tons, the fund's lowest level since September 25, 2025.

The British pound rose against a basket of major currencies in European trading on Tuesday, recovering against the US dollar after three consecutive sessions of losses, supported by a weaker greenback as hopes grew that diplomatic efforts could help contain the military escalation between the United States and Iran.

Investors are awaiting key UK labour market data due later today, which could reshape expectations for the Bank of England's interest rate path over the remainder of the year.

The Price

• The pound rose about 0.1% against the US dollar to $1.3440, up from the opening level of $1.3431. It touched an intraday low of $1.3422.

• Sterling lost around 0.2% against the dollar on Monday, marking its third consecutive daily decline, as traders continued profit-taking following its two-month high of $1.3558.

US dollar

The US Dollar Index fell 0.1% on Tuesday, heading for its first decline in four sessions, reflecting broad weakness in the US currency against a basket of major and minor peers.

The pullback came as demand for the dollar as a safe-haven asset eased, with improving investor sentiment and stronger risk appetite driven by growing optimism that diplomatic efforts could successfully contain the military escalation between the United States and Iran.

Oil prices

Global oil prices fell more than 0.5% on Tuesday, retreating from six-week highs amid profit-taking and rising hopes that diplomatic efforts would ease tensions around the Strait of Hormuz, ensuring the continued flow of oil shipments through the critical waterway.

Iran conflict update

• The US military announced a new round of airstrikes against Iranian military targets, marking the tenth consecutive day of operations.

• The strikes targeted command centers, missile launch sites, drone facilities, and air defense systems as part of Washington's efforts to reduce Iran's ability to threaten shipping through the Strait of Hormuz.

• Iran said it would continue its military response, with reports indicating attacks on US military bases and facilities across the region.

• US President Donald Trump said: "Every time Iran kills an American soldier, it will pay many times over."

• International mediators submitted a formal proposal to Tehran calling for a 10-day ceasefire in an effort to revive the previously agreed temporary accord and reduce military tensions.

• Iran's Foreign Ministry confirmed that indirect contacts and exchanges of messages and proposals with Washington through mediators remain ongoing despite the continued airstrikes.

UK interest rates

According to global interest rate futures markets, traders are currently pricing in roughly a 25% probability that the Bank of England will raise interest rates at its July meeting.

UK labour market

Investors are awaiting key UK labour market data later today, including June claimant count figures, as well as May unemployment and wage growth data, which are expected to help refine market expectations for the Bank of England's policy outlook.

Pound outlook

We expect that if UK labour market data comes in weaker than markets anticipate, expectations for further Bank of England rate hikes this year will ease, putting renewed downward pressure on the British pound.

The New Zealand dollar rose broadly in Asian trading on Tuesday, climbing to its highest level in seven weeks against the US dollar after New Zealand reported stronger-than-expected inflation data for the second quarter.

The figures highlighted mounting inflationary pressures facing policymakers at the Reserve Bank of New Zealand (RBNZ), reinforcing market expectations that the central bank will continue normalizing monetary policy.

The data also strengthened expectations that the RBNZ will raise interest rates at its September meeting, a move that would mark the country's second rate hike since the beginning of the year.

The Price

• The New Zealand dollar rose 0.6% against the US dollar to 0.5873, its highest level since June 5, after opening the session at 0.5838. It touched an intraday low of 0.5832.

• The currency ended Monday down less than 0.1% against the US dollar, marking its second loss in the past three sessions, as escalating military tensions between the United States and Iran boosted demand for safe-haven assets.

New Zealand inflation

Statistics New Zealand reported on Wednesday that the annual Consumer Price Index (CPI) rose 4.1% in the second quarter of 2026, the highest reading since the fourth quarter of 2023. The figure exceeded market expectations of a 4.0% increase and followed a 3.1% rise in the first quarter.

On a quarterly basis, CPI increased 1.5% in the second quarter of 2026, up from 0.9% in the previous quarter and above market expectations of a 1.4% increase.

The data showed that New Zealand's annual inflation rate remained above the RBNZ's medium-term target range of 1% to 3% for a third consecutive quarter.

The renewed inflationary pressures have strengthened the case for the Reserve Bank of New Zealand to continue tightening monetary policy and raise interest rates in the near term.

New Zealand interest rates

• Following its July meeting, the Reserve Bank of New Zealand said further interest rate increases may be required, although the timing and magnitude of any future moves will depend on incoming economic data, inflation trends, and the strength of economic activity.

• Following the inflation data, market pricing for a 25-basis-point rate hike at the September meeting increased from 85% to 95%.

• Investors will closely monitor upcoming New Zealand economic data on inflation, employment, and economic growth to further refine expectations for the central bank's policy path.

Analysis and commentary

Satish Ranchhod, Chief Economist at Westpac, said the inflation data was not as alarming as the Reserve Bank of New Zealand may have feared, particularly given the continued easing in core inflation, "but headline inflation remains elevated."

Ranchhod added that Westpac expects the Reserve Bank of New Zealand to raise its official cash rate at both the September and December policy meetings.