The U.S. dollar declined on Tuesday, heading toward recording its seventh consecutive daily loss, as investor hopes increase for reaching a diplomatic solution to the conflict in the Middle East, despite the U.S. military beginning the implementation of a blockade on Iranian ports.

The dollar index, which measures the performance of the American currency against a basket of six major currencies, fell by 0.28% to 98.061, to trade near its weakest levels since March 2, which was the first trading day after the outbreak of the war between the United States, Israel, and Iran.

If this trend continues, this will be the longest daily losing streak for the index since December, when investors were betting on a year witnessing a cut in U.S. interest rates and general weakness in the global reserve currency.

Five sources reported on Tuesday that negotiating teams from the United States and Iran may return to Islamabad later this week, after the highest level of talks between the two countries in decades ended during the weekend without achieving a breakthrough.

U.S. President Donald Trump said that Iran reached out on Monday and expressed its desire to reach an agreement, but he stressed that he would not agree to any deal that allows Tehran to possess a nuclear weapon.

Blockade increases Strait of Hormuz disruptions

At the same time, the blockade imposed by the U.S. military on Iranian ports sparked anger in Tehran and increased uncertainty regarding the reopening of the Strait of Hormuz, which is a vital corridor for shipping a large percentage of the world's oil and gas.

The closure of the Strait led to a rise in dollar-denominated oil prices, which had a supporting effect on the movements of the American currency.

Nick Rees, head of macroeconomic research at Monex Europe, said that the risk factor remains the main driver for markets, explaining that markets have become, on one hand, less responsive to economic data that previously moved them strongly, and on the other hand, more sensitive to rumors and developments coming from the Middle East, especially regarding the possibility of reaching a solution or the continuation of escalation.

The euro rose by 0.35% against the dollar to $1.1798, and the British pound also climbed by 0.46% to $1.3564, returning to its levels before the outbreak of the war.

Elsewhere, the dollar declined by about 0.4% against the Japanese yen to 158.75 yen.

The yen remains vulnerable to selling pressure amid concerns of the deterioration of Japan's trade balance and the high probability of oil prices remaining at elevated levels, according to Keiichi Iguchi, senior strategist at Resona Holdings.

The probability of the Bank of Japan raising interest rates this month has also declined, after having been considered strong previously, as the war increased market volatility and negatively affected the clarity of economic forecasts.

Ray Attrill, head of currency strategy at National Australia Bank, said that the Bank of Japan remaining unchanged in its position at the end of April could push the dollar-yen exchange rate to exceed the 160 yen level, a level viewed in markets as a red line that may call for government intervention in the currency market.