The dollar index held steady amid calmer conditions in the Middle East on Tuesday.
However, markets remain cautious after tensions escalated yesterday as fresh incidents in the Gulf have heightened uncertainty around the diplomatic process, raising the risk of a broader breakdown in negotiations and reinforcing demand for the dollar as a safe-haven asset.
Elevated tensions are likely to keep oil prices supported, anchoring inflation concerns and treasury yields.
The latter remain relatively firm despite a slight retreat today as markets consider the likelihood of a prolonged period of cautious monetary policy, while interest rates are expected to remain on hold until late next year.
Attention now turns to incoming US data, which could shape expectations for the Federal Reserve’s next steps. The ISM Services PMI and JOLTS figures are expected to show limited change. However, any meaningful deviation could trigger volatility across both bond and currency markets and alter the monetary policy outlook. At the same time, risks of new interventions by Japanese authorities to support the yen could continue to threaten the market and could limit the upside potential for the dollar.
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