The US dollar edged lower on Tuesday as investors weighed the prospects of an agreement that could reopen the Strait of Hormuz against expectations for higher US interest rates following last weeks strong employment data.

The US economy is generally viewed as less vulnerable to energy shocks than many other major economies. As a result, investors flocked to the dollar as a safe-haven asset during the recent escalation in the Middle East, while both the euro and the Japanese yen came under selling pressure.

Conversely, investors tend to sell the dollar against the euro and the yen when developments in the Middle East point to a potential peace agreement that could ease pressure on oil prices.

US Treasury yields surged on Friday after data showed that American employers added significantly more jobs than expected in May, reinforcing bets that the Federal Reserve could raise interest rates later this year.

Thierry Wizman, Global FX and Rates Strategist at Macquarie Group, said that following Fridays data, markets may have shifted from a growth-driven narrative to one focused on rising real yields.

Iran and Israel announced on Monday that they would halt mutual attacks following a call from US President Donald Trump, although Tehran warned that it would resume operations if Israel continued targeting Hezbollah in Lebanon.

Wizman added that the current state of no agreement and no war between the United States and Iran may not be sustainable indefinitely.

He noted that the US administration could eventually seek to reopen the Strait of Hormuz by force, particularly if global oil inventories fall to critically low levels.

The US Dollar Index, which measures the currency against a basket of major peers, slipped 0.12% to 99.88 after reaching its highest level since April 6 on Monday.

Meanwhile, the euro gained 0.1% to $1.1545 as direct military strikes in the Middle East subsided and investor attention shifted toward the upcoming European Central Bank meeting, where markets expect a 25-basis-point rate hike.

Investors are also awaiting US inflation data due on Wednesday for additional clues about the Federal Reserves next policy move. Interest rate futures currently imply a 70% probability of a rate hike by December, according to the CME FedWatch Tool.

Analysts noted that resilient economic growth and persistent inflation pressures could continue to support expectations for higher US interest rates, even if Washington and Tehran ultimately reach an agreement.

The Japanese yen weakened to 160.22 per dollar, remaining close to the 160 level that markets view as a potential trigger for official intervention by Japanese authorities.

At the same time, markets have almost fully priced in a Bank of Japan rate hike at its June 16 meeting, although analysts believe that such a move alone may not be enough to reverse the yens weakness in a meaningful way.

Lee Hardman, Senior Currency Economist at MUFG, said that a decision by the Bank of Japan not to raise rates again would likely generate a more negative reaction in the yen and reinforce concerns that the central bank is falling behind the curve in addressing inflation risks.

Meanwhile, the risk-sensitive Australian dollar rose 0.14% to $0.7054.