Dollar weakens as diplomatic talks hopes ease inflation concerns and weigh on yields

The dollar index declined on Tuesday, hovering near multi-week lows as risk sentiment improved.

The currency could see additional pressure after signals that talks between the US and Iran could resume.

Comments from the US administration helped restore confidence in a potential diplomatic resolution.

This shift in tone eased immediate concerns over prolonged supply disruptions, leading to a slight pullback in oil prices and a moderation in inflation expectations.

The softer inflation outlook fed directly into bond markets, with long-term Treasury yields declining and monetary policy expectations softened to a certain extent. At the same time, interest rate forecasts continue to point to a cautious outlook overall, with rates expected to remain unchanged for now.

Attention now turns to the upcoming producer price data, where an upside surprise may reignite upward pressure on yields and provide support to the dollar, while a weaker outcome would likely weigh on both. The market could also react to any comments from the Federal Reserve officials.