The US dollar strengthened broadly on Tuesday as talks to end the war in the Middle East showed no signs of progress, pushing oil prices higher and worrying investors that interest rates may need to stay higher to tackle inflationary pressures.
Investors now fear that the ceasefire that has been in place since April 7 could be in danger and hostilities could resume in the conflict, which began at the end of February, killing thousands and halting vital energy flows.
With the crucial Strait of Hormuz staying largely closed, Brent crude futures were up 0.6% at $104.88 a barrel. US West Texas Intermediate was at $98.93 per barrel, up 0.89% on the day.
US President Donald Trump said the ceasefire with Iran was "on life support" after the latest back and forth on a proposal to end the war made clear the two sides were still far apart on a number of issues.
The currency market was in a risk-off mood, with focus shifting to Trump's visit to China later this week, as well as the US inflation report due later in the day. US Treasury Secretary Scott Bessent is also in Asia for meetings in Japan and South Korea.
The euro weakened 0.24% to $1.1754, while sterling last bought $1.3575, down 0.26% on the day. The dollar index , which measures the US currency against six others, was at 98.17, up 0.2%.
The dollar initially benefited from safe haven flows when the war first broke out but has since given up much of those gains and remains choppy on shaky prospects of a peace deal and a ceasefire that appears to be hanging by a thread.
Christopher Wong, currency strategist at OCBC, said Trump's rejection of Iran's response to the US peace proposal has kept markets cautious and helped to put a floor under the dollar.
"Still, USD gains were contained, suggesting markets are not yet treating the latest headlines as a full risk-off shock," Wong said, noting a formal breakdown in diplomatic discussions or fresh military escalation could bring a bigger reaction.
INFLATION DATA TAKES THE STAGE
The spotlight will be on a US inflation report, which is forecast to show consumer prices rose 0.6% last month after jumping 0.9% in March, according to a Reuters survey of economists. Estimates ranged from a 0.4% gain to a 0.9% rise.
The data will reinforce the view that the Federal Reserve is likely to keep interest rates unchanged in the near term. Traders have priced out the prospect of rate cuts for the year compared to the two cuts expected before the Iran war broke out.
"The risk is that core inflation is stronger than consensus expectations because of spillover from energy prices to other prices such as airfares and food," said Sarah Hammoud, currency strategist at Commonwealth Bank of Australia.
"An upside surprise to US core inflation will push up US interest rates and the dollar."
Meanwhile, the Japanese yen was choppy at 157.12 per US dollar as traders weighed comments from Bessent and his Japanese counterpart, Satsuki Katayama, after their meeting in Tokyo.
The US and Japan maintain "constant and robust" coordination in tackling undesirable, excessively volatile currency moves, Bessent said.
The remarks suggest Washington broadly consents to Japan's recent round of yen-buying intervention aimed at propping up its sagging currency, which is inflicting pain on the economy by pushing up import costs.
The risk-sensitive Australian dollar was 0.27% lower at $0.723 ahead of the federal budget release, while the New Zealand dollar eased 0.17% to $0.59531. Bitcoin was last down 0.65% at $81,272.
The firmer dollar cast a shadow on emerging market currencies with the Indonesian rupiah and Indian rupee hitting new all-time lows.
