The US dollar traded little changed on Monday after posting a modest weekly loss, as investors awaited developments in Middle East peace talks and this weeks US employment data, which could influence the future path of Federal Reserve policy.

The dollar index, which measures the US currency against a basket of six major currencies, declined last week amid expectations that the United States and Iran were moving closer to an agreement that could lead to the reopening of the Strait of Hormuz.

The closure of the key oil shipping route drove energy prices higher and worsened inflation expectations, prompting some traders to increase bets on a Federal Reserve interest rate hike later this year.

However, with no new signs of progress in the negotiations and renewed tensions between the United States and Iran over the weekend, currency markets have shifted into a wait-and-see mode.

We are waiting to see progress in one direction or the other, said Tommy von Brmsen, FX strategist at Handelsbanken.

He added that reopening the Strait of Hormuz and a decline in oil prices could weaken the dollar in the short term, while risk-sensitive currencies such as the Swedish krona would likely benefit.

The dollar initially gained support during the conflict due to safe-haven demand and the relatively limited impact of higher energy prices on the US economy. However, it has since surrendered part of those gains amid uncertainty surrounding the future of the conflict.

The dollar index was little changed at around 99.02 after declining 0.4% last week.

Meanwhile, the euro edged down to $1.1652, while the British pound rose 0.1% to $1.3460.

Focus shifts to the Federal Reserve

Markets are now betting that the Federal Reserves next move will be an interest rate hike, reversing expectations that had pointed to rate cuts before the outbreak of the Iran conflict.

The shift reflects higher energy prices and their potential impact on inflation, as well as the continued strength of the US labor market.

The US nonfarm payrolls report is due on June 5. Economists surveyed by Reuters expect the unemployment rate to remain at 4.3% and for the economy to add approximately 85,000 jobs.

In a related development, Jerome Powell, whose term as Federal Reserve Chair officially ended on May 15 but who remains a member of the Board of Governors, warned against the politicization of monetary policy.

In remarks delivered on Sunday, Powell said one reason he chose to remain on the Board was what he views as ongoing threats to the independence of the US central bank.

Several Federal Reserve officials are scheduled to speak this week, including Beth Hammack, Lorie Logan, and Mary Daly.

The Japanese yen under scrutiny

Investors are also awaiting a speech from Bank of Japan Governor Kazuo Ueda on Wednesday for clues on whether the central bank intends to proceed with an interest rate hike at its next meeting.

Although there is no full consensus within the Bank of Japan regarding the decision, sources familiar with the matter indicated that pausing the reduction of government bond purchases is gaining support among policymakers.

The Japanese yen slipped 0.1% to 159.45 per dollar, remaining close to the 160 level that previously prompted Japanese authorities to intervene in the foreign exchange market to support the currency.

160 appears to be the red line for Japanese authorities, von Brmsen said.

I believe we will see another intervention if we approach that level again.

The Australian dollar was little changed at $0.7179, while the New Zealand dollar fell 0.4% to $0.5969.