The US dollar traded within a narrow range on Tuesday as investors monitored any signs of progress toward an agreement to reopen the Strait of Hormuz, while also awaiting key US economic data later in the day that could help shape expectations for Federal Reserve monetary policy.

A peace agreement between the United States and Iran would ease pressure on oil-importing economies such as Japan and the eurozone, while also reducing demand for the US dollar as a safe-haven asset.

US President Donald Trump said on Monday that talks with Iran remain ongoing, despite reports that Tehran had suspended indirect negotiations with Washington aimed at ending hostilities. The reports contributed to a modest decline in oil prices.

Investors remain cautious about any news suggesting progress toward ending the US-Israeli conflict with Iran, given the fragile nature of the ceasefire agreement reached between Washington and Tehran in early April.

Meanwhile, Lebanons announcement on Monday of a limited ceasefire between Hezbollah and Israel failed to provide a meaningful boost to market sentiment.

The US Dollar Index, which measures the greenback against a basket of six major currencies, slipped 0.05% to 99.05. The index has traded within a relatively tight range of approximately 98.9 to 99.5 since May 15.

According to Michael Pfister, markets regained some relief by Monday evening as it appeared the US president had successfully helped secure another ceasefire in Lebanon.

He added that foreign exchange markets are likely to remain highly sensitive to geopolitical headlines throughout the day, while any setbacks in negotiations will be viewed with considerable caution.

The dollar initially benefited from the conflict with Iran, which began on February 28, supported by safe-haven demand and the US economys relatively limited exposure to inflation caused by higher energy prices.

However, the currency has since surrendered part of those gains amid uncertainty surrounding the future course of the conflict.

Focus shifts to US data

Later today, the US Department of Labor will release job openings data ahead of Fridays closely watched monthly employment report, as markets continue to bet that the Federal Reserves next move will be a rate hike.

Paul Mackel said that a combination of loose financial conditions in the United States, fading safe-haven support for the dollar, and the Feds cautious tone has kept the currency contained.

He added that a turning point may be approaching, with markets increasingly focused on incoming economic data and future guidance from central banks, particularly the Federal Reserve.

Mackel also highlighted the Federal Reserve policy meeting scheduled in two weeks.

Economists surveyed by Reuters expect Fridays employment report to show that the US economy added 85,000 jobs in May, while the unemployment rate is projected to remain unchanged at 4.3%.

The 160 yen level remains in focus

In Japan, Finance Minister Satsuki Katayama said on Tuesday that authorities stand ready to intervene in currency markets if necessary, although she declined to comment on recent exchange-rate movements.

The Japanese yen weakened slightly to 159.72 per dollar, moving closer to the 160 level that markets widely regard as a potential trigger for official intervention.

Masafumi Yamamoto said that if USD/JPY breaks above 160, the risk of surpassing the April 30 high would increase significantly, raising the likelihood of stronger verbal warnings, fresh rate checks, or direct market intervention.

Investors are also awaiting remarks from Kazuo Ueda on Wednesday for clues on whether the central bank intends to proceed with a rate increase next week.

Derek Halpenny noted that policy action remains likely and that, even with softer inflation, the risk of falling behind economic developments continues to grow.

Markets still lean toward higher US rates

Despite recent developments, investors remain largely convinced that the Federal Reserves next move is likely to be a rate increase.

According to Fed Funds futures, a 25-basis-point rate hike remains fully priced in by March 2027, while markets currently assign roughly a 60% probability to such a move by December.

With geopolitical uncertainty still elevated, market participants appear reluctant to abandon expectations for tighter monetary policy.

Even if geopolitical tensions ease further, inflation is expected to remain elevated for longer. Oil prices continue to trade well above year-ago levels, while a 6% increase in the US Producer Price Index (PPI) during April points to the risk of persistent consumer inflation in the months ahead.

During todays session, dollar traders are expected to focus on the April JOLTS job openings report ahead of Fridays Nonfarm Payrolls release, as they assess whether continued labor market strength could allow the Federal Reserve to raise interest rates sooner than currently expected.