The US dollar rose slightly on Thursday, but remained below its six-week high, amid growing hopes that Washington is nearing an agreement with Tehran to end the war in the Middle East, limiting gains for the US currency.

US President Donald Trump said on Wednesday that negotiations with Iran had entered their final stages, while simultaneously warning of further attacks if Tehran did not agree to a deal.

The dollar, considered a safe haven for investors, rose 0.1% against the Japanese yen to 159.06 yen, after recording its first decline against the Japanese currency in eight sessions on Wednesday.

The yen also received additional support following hawkish comments from Junko Koida, a member of the Bank of Japan's board of directors, who said the central bank needs to continue raising interest rates as core inflation stabilizes near its 2% target.

In contrast, the euro fell 0.2% to $1.16005, after dropping on Wednesday to its weakest level since April 7 at $1.1583 before rebounding.

The pressure on the euro came after data showed that economic activity in France contracted in May at its fastest pace in five and a half years.

Kenneth Burrow, head of currency and interest rate research at Societe Generale, said that “the French purchasing managers’ data were very bad, but the European Central Bank seems determined to raise interest rates,” in explaining the weakness of the euro.

Traders are also awaiting the release of the Eurozone Composite Purchasing Managers’ Index (PMI) data later today.

The British pound fell 0.1% to $1.3421.

The dollar index, which measures the performance of the US currency against a basket of major currencies, rose 0.2% to 99.295 points, but remained below Wednesday's peak of 99.472 points, its strongest since April 7.

Joseph Capurso, head of currency strategy at Commonwealth Bank of Australia, said that safe-haven flows have reversed due to positive news regarding the war with Iran.

But he added that the United States might resort to military escalation in order to strengthen its negotiating position, despite the existence of internal political motives pushing it towards peace.

Investors are focusing on the potential inflationary impact of rising energy prices as the Strait of Hormuz remains partially closed to shipping traffic.

Currency analysts at Commerzbank said some central banks might consider the current inflation shock “temporary” if the strait reopens in the coming days, but they believe this assessment would be wrong because it does not take into account the decline in purchasing power.

They added that currencies could benefit in countries whose central banks are slow to characterize rising prices as temporary, while the possibility of monetary policy tightening remains.

Minutes from the Federal Reserve's April meeting, released Wednesday, also showed officials growing concern about inflation, with more of them open to the possibility of needing to raise interest rates.

In other markets, the Australian dollar fell after a surprise jump in the unemployment rate to its highest level since 2021, easing expectations of further interest rate hikes by the Reserve Bank of Australia.

The Australian dollar fell 0.55% to US$0.71105, after traders reduced their bets on monetary policy tightening this year.

Westpac economist Ryan Wells said expectations for a rate hold at the June meeting have become “high confidence,” but noted that inflation remains the central bank’s biggest challenge.