US Dollar Index retreats from a two-month high after Trump cancels planned strikes on Iran.
Diplomatic efforts between Washington and Tehran revive hopes for an end to the Mideast war.
Higher US inflation supports expectations of a hawkish Fed, keeping downside in the Greenback limited.
The US Dollar Index (DXY), which measures the Greenback's value against a basket of six major currencies, trims earlier gains on Thursday after US President Donald Trump said he had cancelled scheduled strikes and bombings against Iran planned for Thursday evening.
At the time of writing, the index is trading around 99.85 after briefly touching 100.31, its highest level in more than two months.
The Greenback initially strengthened after Trump warned that the United States would hit Iran "very hard" and take control of Iran's Kharg Island and other oil infrastructure facilities.
Earlier this week, both sides exchanged retaliatory attacks across the Gulf region after Iran downed a US Apache helicopter near the Strait of Hormuz.
Meanwhile, diplomatic efforts remain ongoing. According to the New York Post, Iran has completed a new draft of a proposed agreement and sent it to Qatari mediators to pass on to Washington.
However, losses in the Greenback remained contained amid growing expectations that the Federal Reserve (Fed) may need to tighten monetary policy or even raise interest rates as higher energy prices continue to feed into inflation.
Data released on Thursday showed the Producer Price Index (PPI) rose 6.5% YoY in May from 5.7% in April. The report followed Wednesday's Consumer Price Index (CPI) release, which showed annual inflation climbing to 4.2% from 3.8%, the highest reading since April 2023.
Still, underlying inflation measures suggest the pass-through from rising energy costs has so far been more limited than expected. Core PPI held steady at 4.9% YoY in May, while Core CPI edged up only slightly to 2.9% from 2.8%.
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