Dollar softens as bond market steadies ahead of Fed minutes

By Jiaxing Li and Niket Nishant

Aug 19 (Reuters) - The U.S. dollar slipped against major peers on Wednesday as Treasury yields eased from recent highs and attention shifted to the upcoming minutes of the Federal Reserve's latest policy meeting.

Renewed tensions in the Middle East and a light data calendar could put the minutes in sharper focus, especially as investors seek clues on the path of interest rates following Tuesday's global bond selloff.

The euro rose 0.19% to $1.1585, remaining close to the two-month high touched earlier this week. Sterling was 0.16% higher at $1.3554 after data showed UK inflation in July rose in line with expectations.

The Japanese yen also strengthened to 159.15 per dollar, pulling away from the closely watched 160 level after giving back much of its intervention gains.

"Japan is struggling with structural problems. But I think the central banks have a strong incentive to keep the yen orderly," said Tom Samuelson, chief investment officer at Vineyard Global Advisors.

The dollar index, which measures the U.S. currency against six major peers, was down 0.21% at 99.43. 

A selloff in U.S. Treasuries appeared to have paused. The yield on the benchmark U.S. 10-year Treasury note declined to 4.686%, while that on the 30-year bond fell to 5.271% after hitting its highest level in nearly 20 years.

The Fed minutes are set to be released at 2 p.m. Eastern Time (1800 GMT) on Wednesday.

MIDDLE EAST IMPASSE KEEPS INFLATION RISK ALIVE

Data released during recent weeks pointed to a softer U.S. economy, including unexpected job losses in July and mild inflation readings, leading investors to scale back rate-hike bets.

"If the Fed does not follow through with the rate hikes that are being discounted, the upside for bond yields should be very limited here," Harvinder Kalirai, chief global fixed income and currency strategist at Alpine Macro, said in a client webcast.

"The labour market and inflation surprise are rolling over and usually that coincides with a narrowing in the dollar's yield advantage, and that feeds through into a softer dollar."

Meanwhile, a stalemate in the Middle East lifted oil prices to nearly three-week highs, keeping the inflation risk alive. U.S. President Donald Trump said on Tuesday there were no talks with Iran and that the Strait of Hormuz was open. Iran said the strait remained shut to shipping.

Elsewhere, the Canadian dollar rose slightly to $1.3872 after Trump paused the implementation of a 50% tariff on Canadian goods for three days, saying the countries had reached a deal. 

(Reporting by Jiaxing Li in Hong Kong and Niket Nishant in Bengaluru; Editing by Christopher Cushing and Barbara Lewis)