Investing.com – The U.S. dollar was largely unchanged in early European trading on Tuesday, reflecting to some extent heightened geopolitical tensions, but remained near recent lows as Federal Reserve rate cuts draw closer.

At 04:55 ET (08:55 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was marginally higher at 100.750, just above the previous session’s 13-month low.

Labor market data drives up the dollar

The dollar rose slightly on Tuesday as heightened geopolitical tensions in the Middle East, Libya and Ukraine boosted demand for the greenback as a safe-haven currency.

However, these gains are limited as traders focus on impending interest rate cuts in the US, especially after the Federal Reserve Chairman hinted at the likelihood of such a move in his speech in Jackson Hole on Friday.

However, the extent of the cut remains uncertain and depends on the data, economists at Deutsche Bank said in a statement on Monday. The extent of the interest rate cut at the upcoming meeting in September will probably depend primarily on the labor market data.

According to current estimates, the Fed will cut interest rates “by 25 basis points at each of the remaining meetings this year and then pause until Q3 25 to gradually lower rates back to neutral.”

German economy shrank in the second quarter

In Europe, the pair traded 0.1% higher at 1.1172, close to the pair’s recent multi-month high.

Data released on Tuesday showed that inflation fell 0.1% in the second quarter of 2024 compared with the previous three-month period.

The year-on-year change for the second quarter was revised to 0.0% from previously reported -0.1%.

The central bank began its rate-cutting cycle in June, and the August data due to be released on Friday will be crucial for the September interest rate decision.

“Any positive surprise could dampen the market’s view of two and a half ECB rate cuts by year-end, narrow the two-year EUR:USD swap differentials even further and support the EUR/USD pair,” iNG analysts said in a note.

was trading 0.2% higher at 1.3222, close to recent highs, with the pound gaining almost 1.5% against the dollar over the past week.

While Fed Chairman Powell hinted at impending interest rate cuts in his speech at the Jackson Hole symposium on Friday, the Governor of the Bank of England remained concerned about “intrinsic” inflation in the economy.

Markets are now calculating that the Fed will cut interest rates more sharply than the Bank of England by the end of the year, which should provide support for the pound.

Yen rally stalls

In Asia, the yen rose 0.4 percent to 145.12, with the yen’s recent recovery stalling after the business services price index – a gauge of producer inflation – came in slightly weaker than expected, raising doubts about how much inflation will pick up this year.

traded 0.1% higher at 7.1289, with the Chinese yuan weakening slightly after Canada announced it would impose a 100% import tariff on Chinese electric vehicle imports following similar measures in the US and Europe.

The country will also impose a 25 percent tariff on Chinese steel imports.