The dollar traded in a narrow range on Tuesday as investors watched for signs of progress on a potential deal to reopen the Strait of Hormuz, while broader geopolitical uncertainty kept markets cautious.
A peace deal between the U.S. and Iran 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, a comment that pushed oil prices lower despite a report that Tehran had suspended indirect negotiations with Washington to end hostilities.
Investors have treated news of progress toward ending the U.S.-Israeli war on Iran with caution, citing the fragility of a ceasefire struck between Washington and Tehran in April.
The dollar index, which measures the currency against six leading currencies, was up 0.1% at 99.29. It has traded in a narrow range of about 98.9 to 99.5 since May 15.
"By (Monday) evening, a sense of relief had returned as the U.S. president had seemingly secured another ceasefire in Lebanon," said Michael Pfister, foreign exchange strategist at Commerzbank.
"The foreign exchange market is nevertheless likely to be dominated by news of the situation today. But any news of setbacks in the negotiations will be met with considerable caution," he added.
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.
More economic numbers
Euro zone inflation data reinforced expectations of a quarter-point European Central Bank rate hike later this month, which markets had already widely priced in. Traders increased bets on further tightening, fully pricing two hikes by December and about a 50% chance of a third.
The euro fell 0.1% to $1.162.
"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.
"However, a turning point is nearing, as much will increasingly depend on key economic data and what central banks say and do next, in particular the Federal Reserve," he added, pointing to the Fed's policy meeting in two weeks.
Yen near 160
In Japan, Finance Minister Satsuki Katayama said on Tuesday authorities stood ready to respond in currency markets as needed, while refraining from comment on recent moves.
The yen was slightly weaker at 159.96 per dollar, near the 160 level widely seen as a trigger for intervention.
Markets are also awaiting a speech by Bank of Japan Governor Kazuo Ueda on Wednesday for clues on whether the central bank will raise rates next week.
"But 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.
Correction: A previous version misstated where the yen traded against the dollar.