Dollar feeble

The US dollar held near multi-month lows against most major currencies on Tuesday as traders walked back expectations of near-term monetary tightening, although the imminent threat of an escalation in the Middle East war left sentiment fragile.

The euro eased away from two-month highs of $1.1614 it touched on Monday, last fetching $1.1571.

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Sterling was at $1.3534, just shy of the three-month peak it hit in the previous session.

Data in the past few weeks have pointed to a softer US economy, including unexpected job losses last month and mild inflation readings, leading investors to scale back expectations of a rate hike by the US Federal Reserve.

Traders expect a 35 percent chance of a rate increase at the Fed’s September meeting, compared with 52.2 percent a week ago, according to the CME FedWatch tool.

They are also no longer fully pricing in a hike by the end of the year.

Most economists polled by Reuters in the past week expect the Fed to keep its interest rate unchanged next month and through year-end, a view they have held for the past several months.

Analysts though remain cautious about where inflation may head, even as long-dated bond yields scale multi-decade peaks, especially with the critical Strait of Hormuz remaining effectively shut and the US-Iran conflict simmering.

“Inflation has been above target for most of the past five years, and whilst a high 2 percent annual pace may prove acceptable to the Fed, it leaves the inflation process with little to no breathing room in a world of constant supply shocks,” said Nohshad Shah, head of EMEA fixed income sales at Citadel Securities.

Iran said it would shift to a “fully offensive” military posture because efforts to negotiate a permanent end to the war have stalled, a senior Iranian official told Reuters as Washington ruled out extending their June ceasefire agreement.

The more than five-month long conflict has upended the global rates outlook and stoked inflationary concerns through most of the year.