Dollar steadies as Middle East escalation counters soft US inflation

By Samuel Indyk and Jiaxing Li

LONDON, July 15 (Reuters) - The dollar was steady on Wednesday as investors balanced renewed U.S. strikes on Iran against softer-than-expected inflation data that reduced expectations of a near-term Federal Reserve interest rate hike.

The dollar was little changed at 162.34 yen. The euro held at $1.1418, while sterling traded at $1.3399.

The U.S. dollar index, which tracks the currency against six major peers, edged up less than 0.1% to 100.97. It fell 0.4% in the previous session, its biggest decline in nearly two weeks, after touching its highest level since July 2.    

EYES ON THE MIDDLE EAST

The latest escalation in hostilities between the U.S. and Iran kept oil prices near one-month highs, maintaining pressure on the inflation outlook.

The U.S. military said it had begun a new wave of strikes on Iran at 6 a.m. ET (1000 GMT) on Wednesday, after U.S. President Donald Trump said on Tuesday that Washington had reimposed a naval blockade of all Iranian ports. 

The dollar has tended to benefit during flare-ups in the conflict because of its safe-haven status and the relatively limited impact of higher energy prices on the U.S. economy compared with some peers.

Cooler U.S. inflation had earlier weighed on the dollar. U.S. consumer inflation slowed more than expected to 3.5% on a year-on-year basis in June, data showed on Tuesday.

The headline consumer price index fell 0.4% month-on-month, its first decline since April 2020, as energy prices retreated.

"The market was building a conviction that the Fed was going to hike in September and it's certainly injected a bit of doubt into that now," said Chris Turner, head of global markets at ING. 

Turner added the Fed would probably need to see further benign inflation readings before ruling out a rate hike later this year. 

"Short-term, these Fed tightening expectations are going to hang around a bit ... so I think the dollar can stay stable, depending on what happens with energy prices," he said.

New Fed Chair Kevin Warsh told the House Financial Services Committee on Tuesday that the central bank has "no tolerance" for persistently elevated inflation, and pledged to "do my job" if challenged by Trump.

Traders are now pricing in about a 70% chance of a September rate hike, while a move later this month is seen as highly unlikely, according to LSEG data.

Elsewhere, Norway's crown weakened against both the euro and the dollar after Norwegian core inflation slowed more than expected in June, easing pressure on the central bank to raise rates next month.     

The New Zealand dollar held near a one-month high at $0.5821, while the Australian dollar edged up to $0.6985.

China's economic growth slowed sharply to 4.3% in the second quarter, its weakest pace in more than three years. The yuan briefly firmed to a one-month high as the data reinforced expectations of further policy support.

(Reporting by Samuel Indyk and Jiaxing Li. Editing by and Kate Mayberry and Mark Potter)