The U.S. dollar held near a one-month high on Wednesday as tensions in the Middle East escalated again and markets awaited the Federal Reserve’s key interest-rate decision later in the day.

The U.S. Dollar Index traded near 101.38, while USD/JPY stood around 163.74, close to a 40-year high.

Markets Await the Fed’s Guidance

Major currencies showed limited movement as investors remained cautious ahead of the Federal Open Market Committee’s decision. Markets are currently pricing in about a 33% probability of a 25-basis-point rate increase.

Most analysts still expect the Fed to leave interest rates unchanged. However, the policy guidance may be more important than the decision itself. Should the Fed maintain rates while delivering a more hawkish message, the U.S. dollar is likely to remain supported.

Australian Dollar Falls After Inflation Data

The Australian dollar declined 0.37% to $0.69475 after inflation data came in below expectations, reducing the likelihood of further rate increases from the Reserve Bank of Australia.

The euro edged up 0.03% to $1.1389, sterling slipped 0.03% to $1.3287, while the New Zealand dollar fell 0.08% to $0.5783.

Renewed Middle East Tensions Support the Dollar

Oil prices rose again after the U.S. military said it had intercepted multiple ballistic missiles launched by Iran toward U.S. forces in the Middle East.

The development revived inflation concerns and supported demand for the U.S. dollar as a safe-haven asset.

Risk of Yen Intervention Increases

The Japanese yen remained close to its weakest level in 40 years. Should USD/JPY rise toward 164, the likelihood of intervention by Japanese authorities to support the currency could increase.

Markets are monitoring both the Fed’s decision and the Bank of Japan’s policy meeting for clues about the timing of any potential intervention.

Conclusion

The U.S. dollar remains supported by geopolitical tensions, elevated yields and expectations that the Fed will maintain a hawkish stance.

The key focus is not only whether the Fed raises interest rates, but also what it communicates about inflation and the direction of monetary policy in the coming months.

Source: Reuters