The dollar eased slightly from a five-month high on Monday, after its biggest weekly gain since 2022, with the prospect of high US interest rates and escalating conflicts in the Middle East lending support to the currency.
The US currency rose as much as 1.6% against six major currencies last week after US inflation data cast doubt on bets on a cut in US rates, while European political leaders signaled a cut in months.
Early moves in currencies on Monday appeared to be based more on expectations of a Federal Reserve rate cut that faded from Iran's attack on Israel over the weekend, where the market reaction was generally moderate.
"There are signs of relief in the market following Iran's attack on Israel over the weekend," said Shaun Osborne, market analyst at Scotiabank.
"For now, the ongoing conflict is still under control."
Iran has threatened to launch an attack on Israel and over the weekend launched more than 300 drones and missiles in retaliation for what it said was an Israeli attack on its consulate in Damascus. The unprecedented drone and missile strikes caused only moderate damage and Iran said it now "considers the matter over".
The US dollar index, which measures the currency against six other currencies, was last down 0.1% at 105.86, slightly below Friday's 5-1/2 month high of 106.11.
Most analysts now view the US dollar as one of the best places to find currency hedges.
The US dollar could potentially benefit as investors continue to reduce bets on a rate cut by the Fed and push back the expected start of the easing cycle to September after a warmer-than-expected consumer price (CPI) report on Wednesday.
The euro, which posted its biggest weekly percentage drop since the end of September 2022 last week as the European Central Bank left the door open to a rate cut in June, strengthened around 0.2% on Monday to $1.0659 despite still trading at a five-month low of $1.06225 reached on Friday.
The pound suffered its biggest weekly percentage drop since mid-July last week but started to recover slightly to trade at $1.2493.
