The dollar retreated on Monday from its highest levels in ten months, marking a cautious start to a week that will feature a series of central bank meetings taking place amid the US-Israeli war against Iran.

Among the institutions holding their first monetary policy meetings since the outbreak of the conflict in the Middle East are the US Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan. These meetings are expected to give investors an indication of how policymakers assess the impact of rising oil prices on inflation and economic growth.

The dollar index edged slightly lower to below the 100-point level, but remained close to the ten-month high of 100.27 points recorded on Friday.

The dollar had benefited from investor demand for safe-haven assets since the start of the US-Israeli strikes on Iran at the end of February. In contrast, other major currencies such as the euro have come under pressure due to their economies reliance on oil imports.

Since the beginning of the conflict, investors have almost completely reversed their bets on a weaker dollar, according to weekly data released by the US market regulator.

However, the euro rebounded from a seven-and-a-half-month low recorded earlier in the session to trade 0.6% higher at $1.1485, while the British pound rose 0.46% to $1.3284, slightly above the three-and-a-half-month low it recorded on Friday.

Francesco Pesole, currency strategist at ING, said that the fact that central bank meetings are taking place this week gives markets an incentive to step back slightly for now.

He added that efforts by US President Donald Trump to secure an international coalition to guarantee safe passage for ships through the Strait of Hormuz may have also contributed to the dollars decline.

Over the weekend, Trump called on US allies to help secure the strait, saying his administration is holding talks with seven countries on the matter. The Wall Street Journal reported that Washington plans to announce early this week that several countries have agreed to escort ships through the waterway.

Nevertheless, oil prices continued to rise as geopolitical tensions persist and the end of the war, now in its third week, remains uncertain.

Reserve Bank of Australia leans toward a rate hike Bank of Japan in a difficult position

The Australian dollar rose 1% to $0.705, supported by hawkish domestic interest rate expectations, as the Reserve Bank of Australia is expected to tighten monetary policy on Tuesday.

Markets now price about a 72% probability that the bank will raise interest rates by 25 basis points.

Carol Kong, currency strategist at the Commonwealth Bank of Australia, said that two additional rate hikes are now expected, one this week and another in May.

She added that in Australia inflation was already elevated even before the outbreak of the Middle East conflict, and the new energy price shock will increase the risk of higher inflation.

Meanwhile, the Japanese yen received some support, pushing the dollar down 0.4% to 159.1.

The yen had been under pressure due to Japans heavy reliance on energy imports from the Middle East, which has cast a shadow over interest rate expectations at the Bank of Japan.

Naomi Fink, chief global strategist at Amova Asset Management, said that the main risk for Japan is not only rising oil prices but also deteriorating trade conditions due to imported energy and logistics costs, alongside a weak yen and limited monetary policy flexibility.

She added that markets, especially the currency market, may be underestimating the likelihood that these pressures could force the Bank of Japan into more difficult policy trade-offs.

Elsewhere, the New Zealand dollar rose 1.2% to $0.584, while the Chinese yuan in onshore trading remained stable as investors assessed new economic data and ongoing trade talks between China and the United States.