The dollar started the week on a steady footing as investors took stock of U.S. economic data ahead of the Federal Reserve policy meeting this week, while escalating geopolitical tensions in the Middle East kept risk sentiment in check.

The dollar index , which measures the U.S. currency against six rivals, inched 0.01% higher to 103.55 on Monday, set for a 2% gain in January as traders temper expectations of early and deep U.S. interest rate cuts.

The Fed in December surprised markets by taking a dovish tone and projecting 75 basis points of rate cuts in 2024, resulting in markets pricing in early and steep easing, with a cut expected as early as March.

But since then, strong economic data and pushback from central bankers have prompted traders to adjust expectations. Markets are currently pricing in a 48% chance of a rate cut in March, the CME FedWatch tool showed, compared with an 86% chance at the end of December.

The euro was down 0.05% at $1.0847, while Sterling was last at $1.2703, up 0.04% on the day ahead of Bank of England meeting later this week.

The Japanese yen strengthened 0.01% to 148.14 per dollar on Monday. The Asian currency is down nearly 5% against the dollar in January, on course for its weakest monthly performance since June 2022.

Meanwhile, investors are wary of heightened geopolitical risks after three U.S. service members were killed in an aerial drone attack on U.S. forces in northeastern Jordan near the Syrian border.

U.S. President Joe Biden blamed Iran-backed groups for the attack, the first deadly strike against U.S. forces since the Israel-Hamas war erupted in October.

The geopolitical ructions could provide the safehaven yen a temporary lift, analysts said.

Elsewhere, The Australian dollar rose 0.21% to $0.659, while the New Zealand dollar gained 0.18% to$0.610.

In cryptocurrencies, bitcoin last rose 0.18% to $42,062.00.

Source: Reuters