The U.S. dollar traded modestly lower during the European session on Friday as investors weighed renewed hostilities between Washington and Tehran against lingering hopes for a broader Middle East peace agreement.

The greenback weakened ahead of the closely watched U.S. jobs report, while markets also assessed the potential impact of higher oil prices and rising geopolitical tensions on the Federal Reserve’s policy path.

The US Dollar Index fell 0.3% in European trade, as of 11:50 GMT. 

"While the USD has softened, no bearish signal has been triggered, as skew has failed to follow spot and up/down volatility measures point to broadly neutral positioning," BofA strategists wrote in a note.

US-Iran Hormuz tensions escalate; Trump says ceasefire intact

Safe-haven demand returned after U.S. and Iranian forces exchanged fire near the Strait of Hormuz on Thursday, raising concerns over a renewed escalation in the region.

Iran accused the U.S. of targeting vessels entering the Strait of Hormuz and striking coastal areas near Qeshm Island, while Washington said it acted in self-defence after Iranian drones, missiles, and small boats targeted three U.S. Navy destroyers transiting the strategic waterway.

Despite the flare-up, President Donald Trump said the ceasefire remained in effect and described the confrontation as limited, while Iran said conditions had returned to normal.

Markets interpreted the comments as a sign that both sides were still seeking to avoid a broader regional conflict.

"With markets awaiting signs of progress on a potential US–Iran deal and the US nonfarm payrolls (NFP) release due later today, some consolidation in Asian FX is possible," MUFG analysts said in a note.

Traders await US jobs data for Fed clues

In Asia, the Japanese yen’s USD/JPY pair was down 0.1% on the day. The Indian rupee’s USD/INR was largely unchanged, while the Singapore dollar’s USDSGD ticked up 0.1%. The Australian dollar’s AUD/USD pair rose 0.2%, while NZD/USD jumped 0.3%.

In Europe, both the EUR/USD and GBP/USD traded 0.4% higher.