Dollar slips as markets wait on Warsh's Fed debut

By Karen Brettell

NEW YORK, June 16 (Reuters) - The dollar dropped on Tuesday on continuing optimism over a peace deal with Iran while investors awaited the conclusion of the Federal Reserve's policy meeting the following day.

Details began to emerge on Tuesday of the U.S. and Iran's interim deal to end the war in the Middle East, with Donald Trump saying it will rule out a nuclear weapon for Tehran and a U.S. official saying it allows Iran to sell oil upon signing.

The greenback is nonetheless trading near the top of its recent range against the euro and Japanese yen, with energy prices expected to remain elevated for months to come.

That also reflects some concerns that new Fed Chair Kevin Warsh could strike a more hawkish tone at his first meeting on Wednesday.

“The Fed decision may be keeping the dollar sellers at bay,” said Adam Button, chief currency analyst at investingLive. “There's a lingering sense in markets that (Warsh is) more of a hawk than he let on during confirmation.”

The pullback in oil prices could help ease price pressures eventually, but inflation remains well above the Fed's 2% target.

The Fed is widely expected to hold rates steady at 3.50% to 3.75% and could drop its easing bias from the policy statement. Fed funds futures traders are pricing in 61% odds of a rate hike by December.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.14% to 99.55, with the euro up 0.16% at $1.1609.

The Japanese yen weakened 0.06% against the greenback at 160.43 per dollar, after the Bank of Japan raised its benchmark rate by 25 basis points as expected to 1%, its highest level since 1995, in a bid to curb inflationary risks stemming from the Middle East conflict.

The board's 7-1 vote, however, left some uncertainty about the timing of the next hike.

Derek Halpenny, head of research for global markets EMEA at MUFG, said the BOJ was as hawkish as could have been expected.

"They've emphasized upside inflation risks. They've made that quite clear. They've made very clear that the monetary stance is still accommodative, and they've made clear that the guidance is the same as before, which is essentially that they can continue to raise rates," he said.

The Reserve Bank of Australia, meanwhile, held rates steady at 4.35% in a unanimous decision, its first pause this year, even as inflation remains elevated. The Australian dollar was little changed at $0.707.

(Reporting by Karen Brettell; Additional reporting by Sophie Kiderlin; Editing by Hugh Lawson and Chizu Nomiyama )