US Dollar Slips Ahead of Key Inflation Data as Middle East Tensions Weigh on Markets

The U.S. dollar edged lower on Tuesday as investors adopted a cautious stance ahead of crucial U.S. inflation reports that could shape Federal Reserve policy expectations. At the same time, rising geopolitical tensions in the Middle East added uncertainty to global financial markets.

The U.S. Dollar Index (DXY), which measures the greenback against a basket of major currencies, slipped 0.1% to 99.95 during late trading. The index had previously touched a two-month high of 100.21, reflecting recent strength driven by expectations of tighter monetary policy.

Market participants are closely watching the release of the May Consumer Price Index (CPI) and Producer Price Index (PPI), scheduled for this week. Strong labor market data and elevated energy prices have increased concerns that inflation may remain stubbornly high throughout 2026. As a result, investors increasingly expect the Federal Reserve to keep interest rates elevated for longer, with some even pricing in the possibility of another rate hike.

Analysts note that inflation forecasts remain elevated, with headline CPI projected near 4.2%, while core inflation is expected to remain closer to 2.9%. These figures are likely to influence expectations surrounding new Federal Reserve Chair Kevin Warsh’s first policy meeting next week.

Geopolitical risks also remained in focus after U.S. President Donald Trump pledged a response following an incident involving a U.S. Apache helicopter near the Strait of Hormuz. The development weakened hopes for a broader diplomatic breakthrough between Washington and Tehran, raising concerns about potential disruptions to global energy supplies.

In Europe, the euro gained modestly against the dollar as investors prepared for the European Central Bank’s upcoming policy meeting. Markets widely expect the ECB to raise interest rates by 25 basis points amid inflation concerns linked to higher energy costs.

Meanwhile, Bank Indonesia surprised markets with an off-cycle 25-basis-point rate hike, lifting its benchmark rate to 5.50%. The move boosted the Indonesian rupiah, which recorded its strongest daily gain in over a year. In Japan, the yen weakened beyond the 160-per-dollar level, renewing speculation about possible intervention by Japanese authorities.

Overall, investors remain focused on inflation trends, central bank decisions, and geopolitical developments, all of which are expected to drive currency market volatility in the coming weeks.