The US dollar pulled back from its recent two-month high on Tuesday as geopolitical tensions in the Middle East showed signs of easing and market focus shifted to the upcoming release of critical US inflation data. The dollar index (DXY) slipped to around 99.85 in early European trading after previously surging on safe-haven demand driven by the Israel-Iran conflict and stronger-than-expected US employment figures.
On Monday, the greenback had traded near 100.10, extending gains after US nonfarm payrolls for May showed 172,000 new jobs – slightly below the revised 179,000 for April but far above the initial reading of 115,000. The unemployment rate held steady at 4.3%, reinforcing expectations that the Federal Reserve could maintain tighter monetary policy. This strength pushed the British pound close to a near two-month low of $1.3304, with sterling trading around $1.334.
Oil prices had jumped as much as 5% after Israel struck an Iranian petrochemical facility, but by Tuesday, President Donald Trump suggested a proposal regarding Iran could be forthcoming within days. Israeli Prime Minister Benjamin Netanyahu said the conflict was not over, while Iran announced the conclusion of its military operations but warned of further action if Israeli strikes continued. The easing of immediate fears reduced demand for traditional safe havens, allowing the dollar to slip.
Investors now look to Wednesday’s US Consumer Price Index (CPI) report and Thursday’s Producer Price Index (PPI) data, which are expected to shape expectations for Federal Reserve interest rate moves. According to the CME FedWatch tool, the probability of a 25-basis-point rate hike in December has risen to 43.2%, up from about 14% a month ago. Strong Chinese trade data and a modest improvement in German industrial output further supported risk appetite, with EUR/USD rising toward 1.1550 and GBP/USD recovering above 1.3350.
Gold edged higher to near $4,340 but remained close to its lowest since late March, reflecting mixed signals from inflation fears and reduced safe-haven flows. Market participants continue to gauge how the Fed and other central banks will balance growth, inflation, and geopolitical risks in the months ahead.
