Dollar dips as labor market remains stable, US-Iran tensions rise

By Chuck Mikolajczak

NEW YORK, July 9 (Reuters) - The dollar dipped for a second straight session on Thursday as the U.S. and Iran carried out renewed attacks, while a stable reading on the labor market kept the focus on potential inflation pressures.

Iranian armed forces launched attacks on U.S. military infrastructure in neighbouring Gulf states following U.S. strikes on Iran's southern coastal and eastern provinces, further straining a three-week-old ceasefire agreement.

Oil prices eased from earlier highs, however, with U.S. crude last down 0.99% at $72.79 a barrel and Brent at $77.56 per barrel, down 0.59% on the day, as markets assessed the possibilities for continued escalations in the Middle East war.

The dollar index, which measures the greenback against a basket of currencies, shed 0.09% to 100.93, with the euro up 0.17% at $1.1434.

"It's safe to say there's a lot of confusion," said Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull in Toronto.

"You could argue the sideways price action, the market is trying to decipher what reality is, but we're going to trade off the tone of the next headline, sadly."

The minutes from the Federal Reserve's June 16-17 meeting, the first under new Fed Chairman Kevin Warsh, showed concern about high inflation mounted among policymakers, and a few participants saw a case to raise interest rates right away.

New York Fed President John Williams said on Thursday that despite the resumption of hostilities in the Middle East, he was not looking for a sustained rise in energy prices over the remainder of the year.

Expectations for a rate hike of at least 25 basis points at the Fed's July 28-29 meeting eased back to 24.1% from 31% in the prior session, but up from 18.2% a week ago, according to CME Group's FedWatch tool. For the September 15-16 meeting, markets are pricing in a 63.5% chance of a hike, down slightly from the 66.6% on Wednesday but an increase from the 54.1% a week earlier.

European Central Bank policymakers gathering last month were presented with projections showing inflation staying above target into next year despite higher interest rates, accounts of the meeting showed on Thursday.

On the U.S. economic front, weekly initial jobless claims dipped by 2,000 to 215,000, below the 218,000 estimate of economists polled by Reuters, indicating the labor market remains on stable footing.

Against the Japanese yen, the dollar weakened 0.15% to 162.31. The Bank of Japan said the Iran war is likely to goad more firms to raise prices later this year, signaling caution over mounting inflationary pressures that could bolster the case for further rate hikes.

Sterling strengthened 0.05% to $1.3391 after hitting a fresh three-week high of $1.343.

(Reporting by Chuck Mikolajczak; addtional reporting by Amanda Cooper in London and Jiaxing Li in Hong Kong; Editing by Kate Mayberry, Chizu Nomiyama and Paul Simao)