The U.S. dollar index was down 0.1% to 99.95

The U.S. dollar on Tuesday eased slightly, as investors remained cautious a day ahead of a key inflation reading that could significantly impact interest rate expectations. Meanwhile, hopes for a peace deal between Tehran and Washington took a hit after U.S. president vowed a response to an Iranian attack on American asset.

At 20:35 GMT, the U.S. dollar index was down 0.1% to 99.95. The index hit a two-month hit at 100.21 in the previous session.

Currency market participants were on edge as they awaited Wednesday’s May U.S. consumer price index (CPI) report and Thursday’s producer price index (PPI) report.

With labour market data last week showing strength, and inflation likely to have been boosted due to surging oil prices from the Iran war, investors believe the country’s central bank will keep interest rates on hold this year or even hike them. That belief has also led to a bond sell-off and surging Treasury yields.

The potential for tomorrow’s Consumer Price Index (CPI) to relieve market participants is complicated because an in-line print would be too far into the nosebleeds, José Torres, senior economist at Interactive Brokers, said.

Indeed, the 4.2% median estimate would be the highest figure since April 2023, or a 37-month high, although decelerating rents and slow gains in housing valuations are expected to keep the core number closer to 3% at 2.9%, the loftiest since last September, he said.

These elevated inflation statistics have investors wondering what new Fed Chair Kevin Warsh will do as he gears up for his first meeting at the helm of the central bank next week. Fixed-income watchers are highly attentive to the former hawk, as the funds curve carries a 69% chance of at least a 25-basis point lift this year, Torres said.

The base case of a hike offers an interesting déjà vu as we progress through 2026, with President Trump wanting cuts rather than increases while his nominee has his hands tied by a Treasury complex that is yelling tighter, not looser, he added.