The dollar firmed on Tuesday as renewed U.S. strikes on Iran dented optimism for a near-term ceasefire, boosting demand for the greenback as investors turned cautious. Iran said the U.S. had violated a ceasefire after it conducted what it called defensive strikes in southern Iran, while U.S. Secretary of State Marco Rubio said that negotiating a deal to halt the conflict could "take a few days."
Hopes for a peace deal had earlier pushed oil prices below $100 a barrel and eased demand for the most widely-held global currency.
Demand for the dollar has picked up slightly as investors grow less confident about a swift end to the conflict, said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
"It's pretty straightforward what happened: we go home over the weekend, thinking we're close to a ceasefire and now there are new hostilities. So I think the market is waiting for developments," Chandler said. The euro was down 0.15% against the dollar at $1.16265. The dollar strengthened 0.29% to 0.785 against the Swiss franc.
The dollar index was up slightly, ahead 0.135%, at 99.15 after falling 0.3% on Monday, when markets outside the U.S. were open.
Oil prices clawed back some of their losses at the start of trading on Tuesday on news of the U.S. strikes. Brent crude futures rose 3.9% to $98.87 a barrel after dropping 7% on Monday. Data showed that U.S. consumer confidence eased in May as worries about inflation linked to the war with Iran intensified, offsetting an improvement in households' perceptions of the labor market.
"If you look at the rally in the stock market, which is a bit of catch up from [Monday], and oil prices — I'd say the market is a bit nervous. I think that's really the story. The economic data doesn't mean so much right now," Chandler added.
The British pound fell 0.3% to $1.3465.
Yen weakens
The shift in sentiment weighed on the Japanese yen, pushing it closer to the 160-per-dollar level that traders see as a potential trigger for intervention by Tokyo. The yen weakened 0.2% against the greenback to 159.24 per dollar.
Treasury yields fell sharply on Tuesday as U.S. markets returned from a three-day holiday, catching up to a drop in global bond yields on expectations of a peace deal. The yield on benchmark U.S. 10-year notes fell 8 basis points to 4.493%.
The Australian dollar, often viewed as a proxy for risk, was down 0.1% at $0.71675. The U.S. dollar strengthened 0.01% to 6.784 versus the offshore Chinese yuan.