Dollar edges lower amid shaky Middle East truce, US inflation data in view

By Chibuike Oguh

NEW YORK, June 9 (Reuters) - The dollar edged lower against peers on Tuesday amid a fragile Middle East truce and with investors looking ahead to key U.S. data later in the week.

U.S. President Donald Trump said Iran had shot down a U.S. Apache helicopter in the Strait of Hormuz and vowed to respond, deepening doubts about prospects for peace between the two countries.

The episode comes after Israel and Iran halted direct attacks on each other on Monday following an appeal by Trump. However, Israel struck the historic port city of Tyre in southern Lebanon on Tuesday, killing at least eight people, in an escalation that complicates efforts to broker a broader peace deal.

The dollar pared losses following Trump's comments. It tends to weaken against peers when tensions in the Middle East ease, as prospects for a peace deal can dampen oil prices.

"There's a strange calm coming over the marketplace when it relates to the Iran conflict," said Amo Sahota, executive director at Klarity FX. "Both parties are trying to avoid a major escalation; Trump in particular wants to avoid a super spike in oil prices. He's actually under a lot of pressure here."

The U.S. economy is seen as relatively insulated from energy shocks compared with its peers, a factor that has supported safe-haven demand for the dollar during the Iran war, while weighing on the euro and Japanese yen.

The euro was 0.07% stronger against the dollar at $1.15435, after hitting a two-month low in the previous session. Against the Swiss franc, however, the dollar edged higher by 0.07% to 0.79825.

U.S. Treasury yields jumped on Friday after data showed employers added far more jobs than expected in May, strengthening expectations that the Federal Reserve could raise interest rates later this year.

Investors are now focused on U.S. inflation data due on Wednesday for further signals on the Fed’s policy path. Fed funds futures indicate a roughly 70% chance of a rate hike by December, according to CME FedWatch.

"The market had to digest last week's rather strong non-farm payrolls report, which is a lot stronger than expected," said Eugene Epstein, head of structuring for North America at Moneycorp in New Jersey. "Certainly, there are geopolitical tensions that have been the case for months now, and we're in the same push-pull situation that we've been hearing over and over again. But the market is focused on the resilience of the U.S. economy."

The U.S. dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was down 0.09% at 99.95 after reaching 100.21 on Monday, its highest level since April 6.

Solid growth and persistent inflation are likely to keep expectations tilted toward further U.S. rate hikes, even as any potential U.S.-Iran deal could offer some relief.

RATE HIKES IN VIEW

Attention is also turning to the European Central Bank’s upcoming policy meeting, where a 25-basis-point rate hike is widely expected. Markets will watch Thursday’s announcement for signals on the policy outlook.

Meanwhile, a Bank of Japan rate hike at the June 16 policy meeting is now almost fully priced in, meaning it is unlikely on its own to trigger a significant reversal in yen weakness if delivered.

The Japanese yen weakened .12% to as low as 160.37, continuing to hover around the 160 level widely seen as a line in the sand for potential official intervention. 

The risk-sensitive Australian dollar weakened 0.26% versus the greenback to $0.7027. The kiwi strengthened 0.09% versus the greenback to $0.5812.

(Reporting by Chibuike Oguh in New York; Additional reporting Stefano Rebaudo in London; Editing by Matthew Lewis and Will Dunham)