The Japanese yen JPY= was roughly flat against the greenback at 162.40 per dollar, putting traders back on alert for possible intervention from authorities in Tokyo as the Japanese currency continues to languish at 40-year lows.
"Japanese authorities appear to have softened their tolerance a touch, though they remain vigilant and have indicated that further forceful intervention is on the cards should we see another dramatic move from here," said Matthew Ryan, head of market strategy at Ebury, a British payment firm.
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, tempering expectations of near-term support for domestic assets.
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.
Other major currencies and crypto
The Australian dollar AUD= last traded at $0.6915 versus the greenback. New Zealand's kiwi NZD= gained 0.24% versus the dollar to $0.5762.
In cryptocurrencies, bitcoin BTC= rose 0.23% to $62,293.66. Ether ETH= was up 0.56% at $1,775.54.
Fed policy expectations stay in focus
Meanwhile, Federal Reserve Governor Christopher Waller said rates may need to rise "in the near term" if data shows inflation remaining well above the central bank's 2% target.
A core CPI reading of 0.3% or higher would likely imply, depending on PPI data due later in the week, that the Fed's preferred core PCE deflator is also running at 0.3% or above, said Ray Attrill, head of FX strategy at National Australia Bank, in a podcast.
"That may well be a trigger for a Fed rate hike as early as the July meeting," Attrill said.
Economists' median estimate for the June core CPI was 0.2% growth month-on-month.
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.
Dollar steadies ahead of U.S. inflation data
The dollar steadied on Tuesday ahead of U.S. inflation data, with Middle East tensions lifting oil prices while the yen held a soft tone amid caution over possible intervention and after policymakers' comments on state pension fund allocations.
The dollar index =USD, which measures the greenback against a basket of currencies including the yen and the euro, was flat at 101.27.
Inflation risks remain in the spotlight with the release of U.S. June CPI data on Tuesday, June PPI gauges the following day, and Fed Chair Kevin Warsh's first semiannual testimony before Congress.
Concerns over escalating tensions between the United States and Iran returned to the fore, with President Donald Trump saying on Monday Washington was reinstating a naval blockade on Tehran and would ensure the Strait of Hormuz remained open for a fee following fresh exchanges of missile and drone strikes.
U.S. and Iranian forces exchanged heavy missile and drone assaults at the weekend, with Tehran striking 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 on Monday. Both U.S. West Texas Intermediate CLc1 and Brent LCOc1 crude futures rose more than 2% to their highest since mid-June in early Tuesday trading.
The euro EUR= was stable against the dollar at $1.1383 and sterling GBP= traded at $1.3347.
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