The dollar held gains on Tuesday as positive economic readings and expectations for Fed policy outweighed concerns about another U.S. government shutdown.
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The dollar regained some ground on Tuesday as investors remained skeptical of a swift resolution to the war in the Middle East, even though U.S. President Donald Trump delayed the bombing of Iranian power stations and energy infrastructure.
Trump on Monday said that the U.S. and Iran had held “very good and productive” conversations about a “complete and total resolution of hostilities in the Middle East”. Iran denied it had engaged in any direct negotiations.
Trump’s comments were “giving a breather to volatility at least, but it’s difficult to see that this is going to trigger a risk-on trend”, said Rodrigo Catril, currency strategist at National Australia Bank.
Trump’s policy track record was keeping markets wary, with traders uncertain whether this marked the start of genuine negotiations or simply a retreat from volatility-inducing threats, Catril said.
The euro was last down over 0.3% against the dollar at $1.1583 after gaining 0.4% in the previous trading session. Sterling eased 0.5% to $1.3388 after jumping nearly 1% on Monday.
Tommy von Brömsen, FX strategist at Handelsbanken, said Trump’s comments were a signal that he was looking for an end to the war.
“Once we get an end, I think we’re going to see some reversal of the FX moves that we’ve seen so far, which would mean a weaker dollar,” von Brömsen said.
The contrasting comments and a fresh wave of fighting have left markets in flux, with investors mindful that the war has all but halted shipments of about one-fifth of the world’s oil and liquefied natural gas through the Strait of Hormuz.
Oil prices were rising again on Tuesday after plunging more than 10% on Monday, with Brent crude futures trading above $101 a barrel as concerns about supply lingered.
The U.S. is a net energy exporter, which has supported the dollar since the start of the war as energy prices soared.
The dollar index , which measures the U.S. currency against a basket of peers, rose 0.2% on Tuesday to 99.362 after dipping 0.4% to near a two-week low on Monday.
The index has strengthened 1.7% this month, on track for its strongest monthly gain since October, as the conflict also fuelled safe-haven demand.
The expected inflationary impact from the jump in energy prices has also prompted markets to scale back expectations of rate cuts from the Federal Reserve, although investors are not yet pricing in any tightening this year, in contrast to other major central banks.
Markets are pricing in at least two hikes each from both the European Central Bank and the Bank of England this year.
“I think most central banks are in wait-and-see mode to see how severe and how persistent this (inflation) will be,” said Handelsbanken’s von Brömsen.
The two-year U.S. Treasury yield, which typically moves in step with Fed rate expectations, rose 4 basis points to 3.878% on Tuesday after dropping over 6 bps on Monday.