Dollar Pares Most Losses

The dollar index pared early losses to trade little changed around 101.4 on Monday, hovering near a one-month high as developments in the Middle East continued to dominate market sentiment. The US suspended its nearly two-week campaign of strikes against Iran late on Friday. In response, Tehran halted its retaliatory military operations and held talks with Oman on ensuring the safe passage of shipping through the Strait of Hormuz. These developments triggered a decline in oil prices, easing concerns over further supply disruptions and a renewed inflationary spiral. As a result, investors scaled back expectations for Fed policy tightening. The central bank is widely expected to leave the federal funds rate unchanged, although markets currently assign around a 33% probability to a rate hike. Looking ahead, a September increase remains the base case, with traders pricing in nearly an 80% chance of such a move.

The dollar index slipped to around 101.2 on Monday, giving back some of last week's gains as oil prices retreated following a pause in hostilities between the US and Iran over the weekend, easing concerns over supply disruptions and inflation. The US suspended its nearly two-week campaign of strikes against Iran beginning late Friday without an official announcement, while Tehran said it had ended its retaliatory military operations and held discussions with Oman over the Strait of Hormuz. Meanwhile, investors are preparing for the Federal Reserve's policy meeting this week, where officials are widely expected to leave interest rates unchanged. However, some market participants believe the central bank could act as early as this week's meeting in response to renewed inflationary pressures. Investors are also awaiting advance Q2 GDP figures and PCE inflation data, as well as earnings from major US companies for fresh insights into the strength of the economy.

The US dollar index was at 101.3, halting the rally that topped at a one-month high of 101.5 on July 23rd, as a slight pullback in energy prices softened growing bets that the Federal Reserve could deliver a rate hike this month. Still, the index remained only 0.3% away from the 15-month high touched late June amid the sustained consensus that the central bank will still deliver a rate hike this year. Energy inflation concerns regained momentum after an escalation to the war between the US and Iran resulted in blockades for energy tankers in the Persian Gulf and Red Sea, lifting oil and fuel prices. The inflationary risks were combined with robust economic data, adding leeway for higher rates. PMI data from the S&P showed that private sector activity grew the most this year. Also, initial unemployment claims fell the most in nearly six decades last week, consolidating the robust momentum of the labor market.