The U.S. dollar strengthened slightly on Wednesday, as investors assessed the potential trajectory of the Iran conflict and awaited a fresh reading of U.S. consumer price inflation.

By 06:06 ET (10:06 GMT), the U.S. dollar index, which tracks the greenback against a basket of currency peers, had risen by 0.2% to 99.02. The euro was mostly unchanged against the dollar, while the British pound inched up by 0.2% to $1.3441.

In a note, analysts at ING flagged that the overall foreign-exchange market remains "strongly driven" by recent wild fluctuations in oil prices due to the war in Iran.

Attention is firmly fixed on the Strait of Hormuz, the narrow waterway south of Iran through which a fifth of the world’s oil flows, much of it destined for countries across Asia. Fears of Iranian attacks have led to a pile-up of vessels on either of the strait, with container companies attempting to guard the safety of crews and struggling to find insurance for sailings.

Brent futures, the global benchmark, now hover around $90 a barrel after having surged to $120 a barrel earlier this week. Gasoline prices in the U.S. have jumped, possibly putting upward pressure on inflation that could lead the Federal Reserve to take a more hawkish monetary policy stance. Higher interest rates may attract more foreign investment, further bolstering the dollar.

Oil prices have been sensitive to a slew of headlines out of the Middle East. A claim by the U.S. Energy Secretary that the military had escorted a tanker through the strait sent Brent oscillating between $81 a barrel and $92 a barrels.

U.S. President Donald Trump has threatened to ramp up American attacks on Iran after reports said that Tehran has placed naval mines across the Strait of Hormuz in recent days. Following a CNN report that Iran had put mines in the bottleneck, although not extensively yet, Trump said on Tuesday that Iran would be hit "at a level never seen before" should the Islamic Republic not remove them.

Meanwhile, the International Energy Agency has proposed the biggest-ever release of strategic oil reserves to help quell the recent ructions in oil prices caused by the Iran war, according to the Wall Street Journal.

Citing officials familiar with the matter, the WSJ said the release would surpass the 182 million barrels of oil that IEA member nations made available after Russia’s invasion of Ukraine in 2022. IEA countries are seen deciding on the proposal on Wednesday, the WSJ said.

Depending on the size of the reserve release, there could be some capping in oil prices in the coming days, the ING analysts said. However, they flagged that the release would be a "temporary measure," adding that "only military de-escalation can drive crude sustainably lower." The IEA’s move might be sending a "hidden signal" to markets that there are few expectations for an immediate ceasefire, they added.

"In our view, these mixed signals could prevent the dollar from dropping much further today unless there are some encouraging headlines on de-escalation," the ING analysts said.

U.S. inflation data ahead

Also on the radar for markets is a reading of U.S. inflation on Wednesday.

Headline U.S. consumer price growth is expected to stay fairly tame on a monthly basis in February, although the outlook for inflation has been darkened by the fighting in Iran.

Economists see the consumer price index -- a key gauge of U.S. inflation -- coming in at 0.3% month-on-month, compared to 0.2% in January. In the twelve months to February, CPI is tipped to equal January’s relatively muted pace of 2.4%.

Still, stripping out volatile items like food and fuel, so-called "core" consumer prices are anticipated to rise by 0.2%, down from 0.3% previously thanks to moderating airfares and winter weather disruptions, analysts at Wolfe Research said. Year-on-year, the measure is expected to match the prior level of 2.5%.

"That said, seasonal strength in core goods, continued firmness in healthcare and other personal service prices, and a rebound in used vehicle prices are likely to offset part of that softness, keeping overall price pressures firm," the Wolfe analysts including Stephanie Roth said in a note.