The US dollar edged lower on Thursday as fresh US strikes in the Middle East continued to weigh on investor sentiment, while a jump in US inflation to its highest level in three years in May kept markets focused on the future path of Federal Reserve monetary policy.

Currency markets remained relatively subdued this week as investors balanced the fragility of the Middle East ceasefire against renewed exchanges of strikes between the United States and Iran, reducing hopes for a near-term peace agreement.

The euro rose to $1.1553, moving away from the 10-week low it touched last week, although it has surrendered most of the gains made following the ceasefire announcement in early April. Attention is now turning to the European Central Bank meeting later today, where policymakers are widely expected to raise interest rates to combat inflation.

Sterling was little changed at $1.33905, while the US Dollar Index, which tracks the greenback against a basket of six major currencies, slipped to 99.903 after the US military announced the completion of strikes against several targets inside Iran.

The US military said it carried out a new round of overnight strikes in Iran, while President Donald Trump pledged additional attacks if a peace agreement is not reached.

The renewed escalation unsettled markets and pushed oil prices higher, with Brent crude rising more than 2% to $95.40 per barrel.

Even so, market reactions were more restrained than in previous episodes, with the dollar showing only limited movement during early Asian trading.

"We are still seeing signs of news fatigue in the markets," said Nick Twidale, chief market analyst at ATFX Global. "A few weeks ago, this type of escalation would have sent Brent crude above $100 a barrel and triggered a much stronger rally in the US dollar."

He added: "The issue is that markets need greater certainty. Will this conflict and the closure of the Strait of Hormuz become the new normal, or is it merely a negotiating tactic that could revive hopes for peace?"

Rate hike concerns

Although the US Consumer Price Index rose 4.2% in the 12 months through May, marking the highest annual inflation rate since April 2023, economists still see limited prospects for further monetary tightening.

Core inflation, which excludes food and energy prices, increased 0.2% during the month after rising 0.4% in April, boosting hopes that inflationary pressures stemming from the energy price shock can be contained.

James Knightley, chief international economist at ING, said labor costs remain the biggest burden on US businesses, and with wage growth continuing to slow, this could help ease pressure on core inflation.

"All of this should help keep inflation expectations under control. Therefore, while we no longer expect the Fed to cut interest rates this year due to stronger economic momentum, we also do not expect a rate hike," he said.

Markets are currently pricing in a full 25-basis-point rate increase in December, a significant shift from earlier expectations that had pointed to two rate cuts this year before the outbreak of the Iran conflict at the end of February.

Japanese yen under pressure

The Japanese yen traded at 160.52 per dollar, keeping traders alert for the possibility of intervention by Japanese authorities to support the currency.

Meanwhile, Bank of Japan Governor Kazuo Ueda was hospitalized for medical treatment and will miss the central bank's June 15-16 policy meeting, where markets widely expect a rate hike.

"We do not expect Ueda's absence to affect the Bank of Japan's decision," said Carol Kong, currency strategist at Commonwealth Bank of Australia. "Both we and the markets continue to expect a 25-basis-point rate increase next week."

In other currency markets, the Australian dollar was little changed at $0.7006 after touching a nine-week low earlier in the session, while the New Zealand dollar held steady at $0.5797.