U.S. dollar holds near multi-month lows

This week’s rising worries helped crimp some of the dollar’s losses through safe-haven flows, with the dollar index trading 0.1% higher at 99.66

The U.S. dollar held near multi-month lows against most major currencies on Tuesday as traders walked ​back expectations of near-term monetary tightening, although the imminent threat of an escalation in the Middle East war left sentiment fragile.

This week’s rising worries helped crimp some of the dollar’s losses through safe-haven flows, with the dollar index trading 0.1% higher at 99.66.

Data in the past few weeks have pointed to a softer U.S. economy, including unexpected job losses last month and mild inflation readings, leading investors to scale back expectations of a rate hike by the U.S. central bank.

Traders expect a 35% chance of a rate increase at the central bank’s September meeting, compared with 52.2% a week ago, according to the ​CME FedWatch tool. They are also no longer fully pricing in a hike by the end of the year.

Analysts remain cautious about where inflation may head, even as long-dated bond yields scale multi-decade highs, especially with the critical Strait of ​Hormuz remaining effectively shut and the Iran-U.S. tensions simmering.

Inflation has been above target for most of the past five years, and whilst a high 2% annual pace may prove acceptable to the Fed, it leaves the inflation process with little to no breathing room in a world of constant supply shocks, said Nohshad Shah, head of EMEA fixed income sales ​at Citadel Securities.

Iran said it would shift to a “fully offensive” military posture because efforts to negotiate a permanent end to the war have stalled, a senior ​Iranian official told Reuters as Washington ruled out extending their June ceasefire agreement.

The more than five-month long war has upended the world rates outlook and stoked inflationary concerns through ‌most of ⁠the year.