The US dollar weakened against most major currencies during trading on Monday following the announcement of a temporary truce in the Middle East, and also amid anticipation of several major central bank meetings this week, most notably the Federal Reserve meeting.

In trading, the dollar fell 0.2% against the Japanese yen to 163.53 yen, on track for its biggest daily decline since July 10, while the euro rose 0.3% to $1.1404 and the British pound climbed 0.1% to $1.333.

The dollar index, which measures the performance of the US currency against a basket of six major currencies, settled at 101.27 points, awaiting the Federal Reserve's monetary policy decision on July 28 and 29.

temporary truce

The suspension of US military operations against Iran led to a drop in oil prices and improved investor appetite for risk, with oil prices falling sharply, as Brent crude dropped 6.5% to $90.45 a barrel.

A senior Iranian official told Reuters that Tehran would halt its attacks as long as the United States committed to ceasing its operations, following a Chinese-led move to revive stalled diplomatic efforts through Pakistan to end the war.

Interest rates and central banks

Investors are awaiting the Federal Reserve meeting this week, amid a lack of clear guidance from its chairman, Kevin Warsh, regarding the future course of monetary policy.

Markets had reassessed their interest rate expectations during July, first after weaker-than-expected inflation data was released, and then with the escalation of the war between the United States and Iran, which temporarily pushed oil prices above $100 a barrel.

Interest rate futures contracts indicate a probability of about 33% for a 25-basis-point rate hike at Wednesday's meeting, compared with just a 16% probability a week ago, according to CME Group's FedWatch tool.

There are also central bank meetings in both Japan and England, and it is widely expected that both the Bank of England and the Bank of Japan will keep interest rates unchanged during their meetings on Thursday and Friday, while remaining cautious about inflation risks.

Despite the yen remaining near its lowest levels in about 40 years against the dollar, the Bank of Japan is likely to leave the door open for further interest rate hikes to support the currency, without providing a clear timetable for these steps, while official statements supporting the yen have not yet had a tangible effect.