Dollar retreats as oil slides on Middle East pause; focus on central banks

The dollar index =USD, which measures the U.S. currency's strength against a basket of six others, was flat at 101.27 ahead of the Federal Reserve's July 28-29 policy meeting.

With new Fed Chair Kevin Warsh offering little guidance on the policy outlook, markets have dramatically recalibrated rate expectations this month, first after a softer-than-expected inflation report and then in response to an escalation in U.S.-Iran hostilities that briefly lifted crude above $100 a barrel.

Fed funds futures are pricing a one-in-three chance of a 25-basis-point hike on Wednesday, up from a 16% probability a week ago, according to the CME Group's FedWatch tool.

"It could be that the market is not particularly well-informed after this meeting because Warsh doesn't like to give forward guidance, and there is so much uncertainty, particularly with respect to how long the Iran war will last," said Jane Foley, head of FX strategy at Rabobank.