Inflation risks remain in focus with the release of U.S. CPI data on Tuesday, PPI gauges the following day, and Fed Chair Kevin Warsh's testimony before the House and Senate.
"Expectations are that CPI will continue to benefit from the fall in oil prices and limited pass through into core is also keeping volatility nicely wrapped," said Marvin Loh, senior global market strategist at State Street in Boston. "The biggest pushback is higher yields again, and equity volatility, which is again within ranges, but pushing into the edges of those bands."
Fed funds futures are pricing in about 30 basis points of rate hikes by the U.S. central bank this year, according to LSEG data.
The Japanese yen slipped against the dollar on Monday after Reuters reported that Tokyo had no imminent plans to change the asset allocations of its state pension funds.
The dollar JPY=EBS was last up 0.46% at 162.43 yen, putting traders back on alert for possible intervention from authorities in Tokyo as the Japanese currency continues to languish at 40-year lows.
The yen and Japanese bonds had rallied on Friday after Finance Minister Satsuki Katayama said the government would seek ways to encourage pension funds, including the Government Pension Investment Fund, to make greater investments in Japanese financial assets.
While the government is exploring ways to boost such investments within the existing allowable ranges of the benchmark portfolio, the initiative will not lead to immediate revisions to GPIF's medium-term objectives, two government sources told Reuters.
"Even if we trade a little bit weaker on the dollar for a while, we do wind up moving back here because it doesn't seem as if the BOJ really wants to increase rates to the degree that they would need to," said Marvin Loh, senior global market strategist at State Street in Boston.
Dollar gains on Middle East tensions and Fed comments
The dollar clung to modest gains on Monday, underpinned by escalating hostilities in the Gulf and hawkish comments from a Federal Reserve governor ahead of the monthly U.S. inflation report.
President Donald Trump said on Monday the U.S. was reinstating a naval blockade on Iran and would ensure the Strait of Hormuz stays open for a fee following fresh exchanges of missile and drone strikes.
Later, Federal Reserve Governor Christopher said rates may need to rise "in the near term" if data shows inflation remaining well above the central bank's 2% target.
Oil and inflation concerns keep traders focused on CPI
The dollar index, which tracks the currency against six peers =USD, rose 0.21% at 101.27. The U.S. currency rose earlier in the session along with oil prices but later lost ground.
The euro EUR= fell 0.26% to $1.1383 and sterling GBP= was down 0.40% at $1.3352, while the Australian dollar AUD= weakened 0.47% to $0.6917.
U.S. and Iranian forces exchanged heavy missile and drone assaults at the weekend, with Tehran targeting U.S. facilities in states across the Gulf on Sunday and saying it had again closed the vital Strait of Hormuz shipping route.
Oil prices rose more than 9% to a one-month high, with Brent crude futures LCOc1 settling at $83.30 a barrel.
"With renewed escalation in the Middle East over the weekend and into this Monday morning, markets are reacting with a mild risk-off tone," said John Velis, Americas macro strategist at BNY. "Investor positioning suggests more room to add USD positions should fundamentals move toward a stronger dollar."
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