NEW YORK, Aug 11 (Reuters) - The U.S. dollar was steady on Tuesday ahead of Wednesday's highly anticipated consumer inflation report for July, which could shape near-term expectations for Federal Reserve policy.
Traders trimmed bets on a September Fed hike after Friday's jobs report showed employers unexpectedly cut payrolls last month.
A resurgence in inflation could revive those hike bets as the central bank continues to battle price pressures that remain stubbornly above its 2% annual target. Conversely, continued disinflation could further dampen tightening expectations.
“So long as this disinflationary trend continues, it's hard to make a case for rates to be going higher,” said Eric Theoret, currency strategist at Scotiabank.
Rising oil prices, driven by an elusive deal to reopen the Strait of Hormuz, have reignited concerns of renewed inflationary pressure, though energy prices remain well below their recent highs.
Crude pared gains on Tuesday after touching its highest level in more than a week, as signs of progress in talks between Oman and Iran over shipping through the strait were offset by ongoing disruptions to Middle East energy flows.
U.S. President Donald Trump on Monday responded to Iran's conditions for a peace deal with his own demand that Tehran pay compensation for people killed in wars, attacks and protests — a rhetorical escalation likely to complicate efforts to reopen the strait.
Fed funds futures traders are pricing in 48% odds of a Fed September rate increase, down from 58% a week ago.
The dollar index , which measures the greenback against a basket of currencies including the yen and the euro, rose 0.04% to 99.81, with the euro flat on the day at $1.1542.
The Japanese yen strengthened 0.05% to 159.19 per dollar.
The U.S. and Japan coordinated last month to shore up the yen after it plunged to a 40-year low against the dollar. The currency has since clawed back some of that loss, raising the prospect of further intervention. Analysts say the yen will keep struggling until fundamentals improve and the Bank of Japan resumes raising rates.
“It's a show-me kind of situation when it comes to rates. Until and when they give us better fundamentals, the currency is just going to keep weakening,” said Theoret.
Elsewhere, the Reserve Bank of Australia kept its cash interest rate at 4.35%, as expected, but warned it may need to raise rates again.
The RBA has increased rates by 75 basis points since February to combat inflation fuelled by surging energy costs.
The Australian dollar strengthened 0.18% versus the greenback to $0.7065.
Reporting by Karen Brettell; Additional reporting by Ankur Banerjee and Alun John Editing by Keith Weir
