The US Dollar steadied on Wednesday after recent gains, remaining close to a one-month high as investors looked ahead to the Federal Reserve's interest rate decision later in the day. Some analysts warned that the chances of an unexpected rate hike have increased.
Meanwhile, tensions in the Middle East escalated again, pushing oil prices higher after the United States and Saudi Arabia carried out joint strikes against Iran-backed groups in Iraq on Wednesday.
The military action followed a US announcement that its forces had successfully thwarted what it described as a surprise Iranian attack targeting American troops stationed in the region.
Currency markets were relatively quiet as traders remained cautious ahead of the Federal Open Market Committee's policy announcement. Markets were pricing in around a 30% probability that the Fed would deliver a 25-basis-point interest rate increase, Reuters reports.
The US Dollar eased slightly on Wednesday, with the Dollar index, which measures the greenback against a basket of six major currencies, slipping 0.08% to 101.33 after climbing to a one-month high of 101.63 on Tuesday, its strongest level since 25th June.
The Euro recovered modestly, rising 0.09% to $1.1395 after dropping to its lowest level in a month during the previous session.
Sterling also edged higher, gaining 0.06% to $1.3298, yet it remained close to its weakest level since 1st July.
Although the Federal Reserve is widely expected to leave interest rates unchanged, the lack of clear forward guidance from Chair Kevin Warsh, together with the recent surge in oil prices driven by renewed tensions in the Middle East, has led a growing number of brokerages to factor in the possibility of an unexpected rate hike.
Furthermore, the Japanese Yen gained 0.18% to 163.55 against the US Dollar on Wednesday. Despite the modest recovery, the currency remained close to a 40-year low, keeping traders alert for the possibility of intervention by Japanese authorities to support the struggling Yen.
Analysts believe the Federal Open Market Committee's policy decision and Warsh's press conference could provide further support for the US Dollar, potentially lifting the USD/JPY exchange rate towards 164.
At the same time, the risk of foreign exchange intervention remains elevated, with Japanese authorities intensifying their verbal warnings over the Yen's weakness. Markets believe a further depreciation of the currency following the Bank of Japan's monetary policy meeting could act as the catalyst for official intervention.