Dollar Edges Higher Amid Middle Eastern Tensions and Fed Cut Expectations

The dollar rose slightly on Tuesday as currencies traded sideways, influenced by Middle Eastern tensions and expectations of U.S. interest rate cuts. Geopolitical concerns muted early currency moves, while major currencies held near highs. Investors awaited key data releases, anticipating a probable U.S. rate cut in September.

The dollar inched higher on Tuesday, with major currencies trading sideways amidst lingering Middle Eastern tensions and investor optimism for imminent U.S. interest rate cuts.

Geopolitical risks subdued early currency movements. Despite fears of an escalating conflict following a major missile exchange between Israel and Hezbollah over the weekend, worries calmed down. This led to the yen dropping 0.2% to 144.82 per dollar, giving up some of its safe haven gains from a previous session high of 143.45 per dollar.

The euro and sterling slightly dipped to $1.1161 and $1.3182, respectively, though remained near recent multi-month highs. The Canadian dollar was little changed at 1.3487 per U.S. dollar after reaching a five-month peak with surging oil prices.

"The market is sort of taking a breather and waiting to see key data releases," said Rodrigo Catril, senior FX strategist at National Australia Bank. "Given also that we have kind of second-tier data releases this week, it plays to the view of a sort of more rangey environment over the near term."

Despite these movements, major currencies were holding near milestone highs, and the dollar near its lowest level in over a year, aided by the likelihood of a U.S. rate cut in September. This speculation was spurred by Fed Chair Jerome Powell's Jackson Hole speech and supportive comments from San Francisco Fed President Mary Daly.

Against a basket of currencies, the greenback was 0.05% higher at 100.90, close to its 13-month low of 100.53 hit in the previous session. Investors are now focused on how much the Fed will cut rates next month. David Chao, Invesco's global market strategist for Asia Pacific ex-Japan, noted that "Powell left the door open for larger cuts if labor conditions deteriorate."

Markets have already priced in a rate cut next month, with about 100 basis points worth of easing anticipated by year-end. Elsewhere, the Australian dollar eased 0.05% to $0.6768, near a one-month high, and the New Zealand dollar edged 0.08% lower to $0.6199, close to a seven-month peak.

(With inputs from agencies.)