The dollar steadied on Tuesday ahead of U.S. inflation data, with tensions in the Middle East lifting oil prices. Meanwhile, the yen maintained a soft tone amid caution regarding potential intervention and following policymakers’ remarks on state pension fund allocations. The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, eased 0.04% to 101.23. Inflation risks continue to capture attention as the U.S. June CPI data is set to be released on Tuesday, followed by the June PPI metrics the next day, alongside Fed Chair Kevin Warsh’s inaugural semiannual testimony before Congress. Concerns over escalating tensions between the United States and Iran returned to the fore, with President Donald Trump saying on Monday Washington was reinstating a ​naval blockade on Tehran and would ensure the Strait of Hormuz remained open for a fee following fresh exchanges of missile ⁠and drone strikes.

U.S. and Iranian forces engaged in significant missile and drone exchanges over the weekend, with Tehran targeting U.S. installations in various Gulf states on Sunday and asserting that it had once more shut down the crucial Strait of Hormuz shipping route. Oil prices increased by 2% on Tuesday, reaching their highest level in four weeks following the announcement from the U.S. regarding the reimposition of a naval blockade. Brent crude experienced a notable increase of 9.6% in the prior session, marking its largest daily gain since May 2020. The euro appreciated against the dollar, reaching $1.1388, while sterling experienced a modest increase of 0.07%, settling at $1.3355. Meanwhile, Federal Reserve Governor Christopher Waller said rates may need to rise “in the near term” if data shows inflation remaining well above the central bank’s 2% target. A core CPI reading of 0.3% or higher would likely imply, depending on PPI data due later in the week, that the Fed’s preferred core PCE deflator is also running at 0.3% or above, according to Ray Attrill. “That may well be a trigger for a Fed rate hike as early ‌as the ⁠July meeting,” Attrill said.

The median estimate from economists for the June core CPI indicated a month-on-month growth of 0.2%.
Fed funds futures indicate an expectation of approximately 30 basis points of rate increases by the U.S. central bank this year, based on LSEG data. The Japanese yen was roughly flat against the greenback at 162.38 per dollar on Tuesday, having given up most of its earlier gains to 162.31, as traders remained on alert for possible intervention from authorities in Tokyo while the currency languished near 40-year lows. The Japanese ​currency briefly strengthened following comments from ​Finance Minister Satsuki Katayama that Tokyo may ⁠consider adjusting state pension fund asset allocations if the environment surrounding asset management changes sharply. The yen and Japanese bonds experienced a rally on Friday following Katayama’s announcement that the government would explore methods to incentivise pension funds, including the Government Pension Investment Fund, to increase their investments in Japanese financial assets.

Source reported on Monday that Tokyo had no imminent plans to change the asset allocations of its state pension funds, tempering expectations of near-term support for domestic assets and prompting the yen to slip against the dollar. “In order for yen-buying pressure from a review of GPIF’s asset allocation to be sustained, the decision would likely need to be made quickly, and the increases in the allocation to domestic assets would probably need to be at ⁠least 5 ​percentage points” in stocks and bonds each, said Masafumi Yamamoto. “If ​the increases are only modest, or if the decision-making process takes time, any additional yen buying is likely to be limited,” he said in a note. The Australian dollar appreciated by 0.07% to $0.6921 against the US dollar. New Zealand’s kiwi appreciated by nearly 0.5% against the dollar, reaching a value of $0.5776.