The dollar rallied on Wednesday ahead of the Federal Reserve's decision on interest rates, but retreated from the day's highs after markets stabilized from an early shock caused by the detention
of Turkish President Tayyip Erdogan's main rival.
Traders are also digesting the Bank of Japan's earlier decision to hold interest rates steady, while the Fed's policy decision later will be crucial for investors eager to know what the central bank makes of Trump's policies and their impact on the US economy, and how that affects the rate outlook.
Fed policymakers are widely expected to keep rates on hold, and will also release new economic projections at the conclusion of the meeting later in the day, Reuters reported.
Feeding into an earlier rally in the dollar was news out of Turkey which saw the lira briefly tumble by the most in a day on record, rippling through major currencies as investors shifted into safe-haven assets.
By 1226 GMT, the euro was down 0.3% versus the dollar to $1.091, having fallen as much as 0.6% earlier. Even so, it remains near a five-month high of $1.0955 scaled in the previous session.
"The news from Turkey is having an impact on G10 currency markets and risk appetite in general," said Jane Foley, head of FX strategy at Rabobank.
"But I would think some of the initial impact of what's happened will begin to filter out from some of the euro trade once the market has become a bit more accustomed to it."
The yen weakened against the dollar, which rose 0.3% to 149.805 in volatile trade as investors mulled the BOJ decision to hold rates steady and comments from Governor Kazuo Ueda .
The widely expected BOJ decision underscored policymakers' preference to spend more time gauging how mounting global economic risks from higher US tariffs could affect Japan's fragile recovery.
"The decision to leave monetary policy unchanged itself is not a surprise, so its impact on exchange rates is limited. However, the earlier-than-usual timing of the announcement seems to have led financial markets to initially interpret that the BOJ (did not consider) bringing forward a rate hike," said Hirofumi Suzuki, chief FX strategist at SMBC.
Adding to nervousness among investors, Israeli airstrikes pounded Gaza overnight, while US President Donald Trump and Russian President Vladimir Putin failed to reach an agreement on a Ukraine ceasefire.
The more risk-sensitive currencies edged lower, with sterling down 0.2% at $1.29795, not far from the previous session's four-month high of $1.3010, while the Australian and New Zealand dollars fell 0.4% and 0.5%, respectively.
Against a basket of currencies, the dollar ticked up 0.2% to 103.55, coming off a five-month low of 103.19 on Tuesday.
The dollar has fallen nearly 4% for the month, pressured by Trump's erratic approach to tariffs and as fears mount of a recession in the world's largest economy.
Traders are currently pricing in nearly 60 basis points of Fed rate cuts by the year end.
"The March FOMC meeting will likely be all about policy uncertainty. The Fed will almost certainly stay on hold, emphasising patience over panic," said analysts at Bank of America Securities.
"The (Summary of Economic Projections) forecasts and distribution of risks are both likely to reflect stagflation: weaker growth and higher inflation."
