The US dollar stabilized during Tuesdays trading after investor hopes for a near-term agreement to reopen the Strait of Hormuz and end the war with Iran weakened, following new US attacks on Iranian targets and comments suggesting negotiations may take longer.

Expectations for a peace agreement had pushed oil prices below $100 per barrel, eased pressure on emerging market currencies, and supported risk appetite in global markets this week.

However, remarks from US Secretary of State Marco Rubio on Tuesday that negotiations with Iran could take a few days came after US forces carried out strikes in southern Iran a day earlier that Washington described as defensive, limiting market optimism.

The euro edged slightly lower to $1.163 after rising 0.3% on Monday, while the British pound fell 0.2% to $1.347 after gaining 0.6% in the previous session.

The dollar index, which measures the US currency against a basket of major currencies, rose marginally to 99.08 points after falling 0.3% the previous day.

Charu Chanana said markets are justified in pricing in some optimism, because merely having a path toward reopening the Strait of Hormuz reduces major risks tied to oil, inflation, and global growth.

She added: Positive signals around negotiations should not be confused with lasting and stable de-escalation. The real test is not in the headlines, but in the ability of oil tankers to move freely, lower insurance costs, and the normalization of energy flows.

The shift in sentiment pressured the Japanese yen, with the dollar rising 0.2% to 159.21, approaching the 160 level that traders are watching closely for potential intervention by Japanese authorities to support the currency.

Sources previously said Japanese authorities intervened in late April to support the yen when it approached that level.

The Australian dollar, often viewed as a gauge of risk appetite, also fell 0.2% to $0.716 after rising 0.6% on Monday.

US Treasury yields fell sharply on Tuesday as US markets reopened after the holiday, reflecting declines in global bond yields driven by expectations for a peace agreement.

Meanwhile, oil prices recovered part of their losses following reports of the US strikes, with Brent crude futures rising 1.5% to $97.76 per barrel after dropping 7% on Monday.

Analysts believe energy prices are unlikely to return quickly to pre-war levels even if a settlement is reached soon, as supply chains will need time to normalize, keeping inflation and interest rate concerns elevated.

Analysts at OCBC said in a note that they expect a gradual decline in oil prices even if they remain below $100 per barrel during the second half of 2026, meaning the support the dollar receives from elevated energy prices will not disappear quickly.

They added: There are no strong reasons to adopt a bearish outlook on the US dollar, citing the continued strength of the US economy alongside inflationary pressures driven by developments in artificial intelligence, which have pushed the Federal Reserve toward a more hawkish stance.