The escalation in hostilities between the U.S. and Iran kept oil prices near one-month highs, maintaining pressure on the inflation outlook.
The U.S. struck Iran's coastal defences and missile sites on Wednesday after re-imposing a naval blockade of its ports, while Iran threatened to shut off more regional energy exports, saying it was engaged in an "existential war" with America.
Oil prices rose for a fourth consecutive day on Thursday, with Brent crude futures last trading near a one-month high at $85.28 a barrel.
Producer prices and Fed rate expectations
U.S. producer prices unexpectedly fell in June, in their biggest decline in 14 months, adding to evidence that inflation was easing before the latest flare-up in the Middle East.
The data, together with surprisingly soft consumer inflation and a slowdown in job growth in June, effectively rule out a Fed interest rate increase this month.
Chances for a hike in July were slashed to 11%, versus a 45% implied probability at the start of the week. Markets still see even odds of at least a 25 basis-point increase in September, according to Fed funds futures prices via CME Group.
"The recent dollar weakness appears to be a correction from previous highs. Markets had aggressively priced in a July rate hike, which now looks somewhat overblown given that inflation is cooling fast," said Bosco Wu, investment strategist at Bank of East Asia.
However, the tightening trajectory is intact as one month of cooling data is unlikely to signal sustained inflation slowdown, and the flare-up in the Middle East should limit downside for the greenback, Wu said.
Dollar near one-month low as inflation data eases Fed hike bets
The U.S. dollar hovered near a one-month low on Thursday, as soft inflation data reinforced bets that the Federal Reserve can stay patient on interest rate hikes, while escalation in Middle East hostilities added upside risk to the inflation outlook.
The greenback slipped against the Japanese yen for the third trading session, by 0.1% to 162.075 yen. The euro was 0.1% higher at $1.1472, its strongest in a month.
Sterling held near a two-month high at $1.354 on market expectations that Britain's incoming prime minister will pick a fiscally conservative finance minister.
The Australian and New Zealand dollars were both down about 0.1%, at $0.6995 and $0.5842 respectively.
The U.S. dollar index, which tracks the currency against six peers, was little changed at 100.47, hovering near its lowest since June 18. It has fallen 0.8% over the previous two sessions and is on track for a weekly decline.
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