The dollar edged up against the euro on Wednesday on lingering concerns about the ongoing US-Israeli war with Iran, even after President Donald Trump extended the ceasefire to give Tehran more time to present a unified proposal for ending the conflict. Iran seized two ships in the Strait of Hormuz on Wednesday, tightening its grip on the strategic waterway, after Trump called off attacks indefinitely with no sign of peace talks restarting.
Markets have been swayed by alternating bouts of optimism that a deal is within reach and fears that the conflict could drag on, causing prolonged disruptions to energy markets.
"It's tough to have a really strong conviction at this point," said Dominic Bunning, head of G10 FX strategy at Nomura. That said, "overall it seems like both sides are more inclined to make progress than to re-escalate."
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was last up 0.06% at 98.44, with the euro down 0.09% at $1.1731. The Japanese yen strengthened 0.09% against the greenback to 159.26 per dollar. Sterling strengthened 0.01% to $1.3507.
CENTRAL BANKS ON HOLD
Markets are pricing in low odds that the Federal Reserve will cut interest rates this year, given the risk that the war could fuel higher inflation.
Fed funds futures traders now see only a 35% chance of one cut by the end of 2026. Traders previously had forecast two cuts, with Kevin Warsh - Trump's nominee to lead the US central bank - seen as more likely to cut rates than Fed Chair Jerome Powell.
Warsh said on Tuesday he had made no promises to Trump about cutting rates, seeking to assure senators considering his confirmation that he would act independently of the White House while pursuing broad reforms.
US Treasury Secretary Scott Bessent said earlier this month that the Fed should "wait and see" before deciding whether to lower rates amid the war in Iran, noting that the US economy had been "very strong" in January and February.
"Since the war began, comments from Treasury Secretary Bessent make it seem like he recognizes that it might take Warsh some time to cut interest rates," said Marc Chandler, chief market strategist at Bannockburn Global Forex.
"And this is what I think we're going to see next week. You've got five G10 central banks that meet and none of them are going to do anything. It's a watch-and-wait" situation, Chandler said.
The Fed, European Central Bank, Bank of Japan, Bank of England and Bank of Canada are all scheduled to hold policy meetings next week.
