US Dollar Slips Ahead of Fed Decision as Oil Prices Ease Inflation Fears

The U.S. dollar weakened on Tuesday, retreating from a more than one-month high as falling oil prices eased inflation concerns ahead of the Federal Reserve’s closely watched interest rate decision.

The U.S. Dollar Index (DXY), which measures the greenback against a basket of six major currencies, slipped 0.1% to 101.42 as traders reassessed inflation risks following a sharp decline in crude oil prices.

Oil prices fell for a second consecutive session after President Donald Trump said the United States had held “very good talks” with Iran, raising hopes that diplomacy could reduce tensions in the Middle East. While expressing optimism about negotiations, Trump reiterated that Iran would never be allowed to obtain a nuclear weapon and warned that the U.S. could resume military action if talks fail. He also repeated threats targeting Iran’s infrastructure, including bridges and power plants, should diplomacy break down.

Investor attention is now firmly on Wednesday’s Federal Open Market Committee (FOMC) meeting. Markets largely expect the Fed to keep interest rates unchanged, with CME FedWatch indicating roughly a 69% probability of no change. However, uncertainty remains elevated as policymakers weigh softer inflation data against lingering geopolitical risks.

Market participants will also closely watch comments from Fed Chair Kevin Warsh. Since taking office, Warsh has maintained a hawkish stance, emphasizing the central bank’s commitment to price stability while launching a broad review of Federal Reserve operations, including its communications strategy and inflation framework.

Goldman Sachs described the upcoming decision as unusually uncertain, noting that lower June inflation has reduced the case for an immediate rate hike. Analysts added that the Fed has historically avoided surprising markets with unexpected tightening. Although the probability of a rate increase remains relatively low at about 32%, Northwestern Mutual Wealth Management Chief Investment Officer Brent Schutte said the odds are still much higher than under former Fed Chair Jerome Powell, reflecting growing inflation uncertainty and reduced forward guidance.

In currency markets, the euro gained 0.2% to $1.1388 after supportive Eurozone data and hawkish remarks from European Central Bank policymaker Peter Kazimir, who signaled another rate hike could still be warranted in September. The British pound edged up to $1.3293 ahead of the Bank of England’s policy meeting, while the Japanese yen remained near multi-decade lows at 163.81 per dollar as investors awaited Friday’s Bank of Japan decision.