Dollar feeble as rate hike bets dwindle, Iran war worries grow

The US dollar weakened to near multi-month lows against major currencies on Tuesday as traders reduced expectations of near-term interest rate hikes from the Federal Reserve. The euro remained near a two-month high, while the British pound held steady near a three-month peak. US retail sales fell in July for the first time in nine months, coinciding with unexpected job losses and mild inflation readings.

This has led investors to scale back rate hike expectations, with the chance of a rate increase at the Fed's September meeting falling from 52.2% to 35% according to the CME FedWatch tool.

Despite the weaker dollar, traders remain cautious about inflation, particularly with the Strait of Hormuz effectively closed and ongoing negotiations stalled in the U.S.-Iran conflict. Iran announced it would adopt a "fully offensive" military stance due to the failure to negotiate a permanent end to the war with the U.S. Bond yields surged worldwide as investors grew wary of high oil prices and a prolonged closure of the strategic waterway.

Brent crude futures rose 0.3% to $91.14 a barrel, while the yield on the 30-year bond neared its highest level in nearly two decades, and the 10-year Japanese government bond yield hit its highest since September 1996.

The focus has also turned to the U.S. Treasury auctions, where investors demand higher yields to absorb the growing U.S. borrowing needs. Longer-dated Treasury issuance has drawn increasing attention as bond market participants push back against the government's fiscal trajectory. The yen dropped near 160 against the US dollar, with the Bank of Japan set to raise interest rates and consider further hikes at their upcoming meeting.

The Australian dollar strengthened slightly, while the New Zealand dollar remained at its strongest level since early June.