The US dollar held near a one-month low on Thursday as investors weighed weaker-than-expected US inflation data, which reduced expectations for interest rate hikes, against the risk of another rise in oil prices due to tensions in the Middle East, which could provide support for the currency.

Lower rate hike expectations weigh on the dollar despite ongoing Middle East tensions

US Treasury yields fell on Wednesday after a second consecutive day of inflation data showed that price pressures continued to ease, weakening expectations for further monetary tightening by the Federal Reserve and limiting support for the dollar.

The US economy is generally viewed as less vulnerable to energy price shocks than many other major economies, making the dollar a preferred safe-haven asset when oil prices rise, often at the expense of the euro and the Japanese yen.

Conversely, any diplomatic breakthrough in the Middle East typically weighs on the dollar against those currencies as lower oil prices improve the outlook for energy-importing economies.

Some investors believe the current escalation with Iran is aimed at strengthening the United States' negotiating position and that tensions could eventually ease once Washington secures greater concessions.

"Markets are also aware that President Donald Trump's threats, strong rhetoric, and deadlines are rarely implemented in full," said Jens Magnusson, Chief Economist at SEB.

"When prices rise too far, particularly oil and gasoline prices, he tends to pull back, allowing prices to decline again," he added.

Oil prices fell on Thursday as investors took profits while continuing to assess the impact of the latest wave of US strikes on Iranian military facilities.

The dollar index, which measures the US currency against a basket of six major currencies, held steady at 100.48, close to its lowest level since June 18. The index has fallen around 0.8% over the previous two sessions and is heading for a weekly loss.

Market expectations for a Federal Reserve rate hike at the July meeting fell to 11%, down from 45% at the start of the week, according to federal funds futures data from CME Group.

However, markets still see an approximately even chance of at least one 25-basis-point rate hike at the September meeting.

The euro was little changed at $1.1469 as investors closely monitored European natural gas futures, which climbed to their highest level since March. The increase raised concerns that higher energy costs could weaken the eurozone economy and limit further gains in the single currency.

Sterling also held near a two-month high at $1.354 following the release of economic data, as investors expect the UK's new prime minister to appoint a finance minister committed to fiscal restraint.

In Asia, the Japanese yen remained close to multi-decade lows as markets focused on potential moves by Japan's Government Pension Investment Fund (GPIF). Japanese Finance Minister Katsunobu Kato said last week that the government wants to achieve a "significant increase" in the fund's investment in domestic assets.

The dollar rose 0.10% against the yen to 162.00, after reaching a multi-decade high of 162.84 earlier this month.

Geoff Yu, Senior EMEA Macro Strategist at BNY, said discussions surrounding the GPIF's strategy indicate that capital allocation by the public sector has become an active economic policy tool rather than merely a long-term objective.

He added that investors should view the shift as a structural, multi-year trend whose impact will extend beyond Japan.

Analysts said the GPIF has the greatest capacity among Japanese investors to influence the foreign exchange market. The fund reviews its investment strategy every five years, with the latest review completed in 2025, while retaining the ability to adjust its asset allocation within its target ranges.

In other currency markets, the Australian and New Zealand dollars each fell around 0.1%, with the Australian dollar trading at US$0.6995 and the New Zealand dollar at US$0.5842.