On Tuesday, the US dollar saw a modest increase. Investors balanced cautious optimism over potential Middle East peace developments against concerns that the Federal Reserve might raise interest rates to combat energy-driven inflation.

The possibility of an agreement to curb Iran's nuclear program, described as "very likely" by former US President Donald Trump on Monday, contributed to market sentiment. In March, a surge in oil prices following Iran's effective blockade of the Strait of Hormuz had boosted the dollar, as it hurt oil-importing economies like Japan and the Eurozone and increased demand for the dollar as a safe-haven asset. Following Trump's recent comments, oil prices fell by 2% on Tuesday.

Paul Mackel, Global Head of FX Research at HSBC, noted several factors preventing the dollar from returning to its March highs. "Global risk sentiment has recovered robustly," he stated, adding that "while there is some tension in the dollar overnight index swap (OIS) market, it does not yet fully price in an aggressive Fed hiking cycle. Furthermore, the global monthly growth momentum remains positive."

Data from the CME FedWatch Tool indicates market pricing currently suggests about a 48.5% probability of a Fed rate hike by December, with a 98.8% chance of rates remaining unchanged at the next meeting in June.

Thierry Wizman, Global FX and Rates Strategist at Macquarie Group, commented, "Even a neutral signal from the Fed in June might not be sufficient to stabilize inflation expectations and US long-term Treasury yields." He added, "Between now and June 6th, there will be a series of Fed speeches, providing a clear opportunity for a hawkish pivot."

The US Dollar Index, which measures the greenback against a basket of six major currencies, rose 0.2% to 99.18. This followed a decline on Monday that ended a five-day winning streak, driven by easing fears of an escalation in regional conflicts.

The euro fell 0.2% against the dollar to 1.1633.

**Yen Nears Intervention Zone**

Government data released on Tuesday showed Japan's economy grew at an annualized rate of 2.1% in the first quarter, supporting market expectations for a potential Bank of Japan rate hike in June. Consequently, the dollar gained 0.15% against the yen to 159.10.

Japanese Finance Minister Shunichi Suzuki told reporters on Monday that Japan is prepared to respond to excessive currency volatility, while ensuring any intervention to support the yen by selling dollars does not push up US Treasury yields.

Investors are closely watching for any further intervention by Japanese authorities to bolster the yen. The current yen exchange rate is slightly stronger than its level just before Japan's first market intervention in nearly two years last month.