Dollar eases as risk appetite returns ahead of central bank decisions

The dollar retreated on Wednesday as investors, sensing a momentary break in the storm, began rotating money back into riskier assets ahead of a critical week of central bank decisions. The greenback had climbed to a ten-month high just days earlier, buoyed by the Middle East conflict now in its third week and the flight to safety that such crises typically trigger. But as markets caught their breath, the appetite for risk returned, and the dollar index—which tracks the currency against a basket of peers—slipped to 99.56 after two consecutive days of losses.

The yen strengthened 0.06% to 158.91 per dollar, a move that carried particular weight given Tokyo's sensitivity to rapid currency swings. Japanese Prime Minister Sanae Takaichi was preparing to depart for Washington that evening to meet President Donald Trump, a visit shadowed by concerns that sharp yen movements might prompt intervention from Japan's authorities. The euro, meanwhile, held steady at $1.1538 as traders awaited the European Central Bank's policy announcement later that day. Sterling remained anchored at $1.3353.

The backdrop for this cautious optimism remained fragile. On Tuesday, Iran's government confirmed that Israel had killed Ali Larijani, the country's security chief and the highest-ranking official targeted since the conflict's opening days. Energy markets, which had spiked on geopolitical alarm, showed what analysts called relatively benign price action overnight—but the underlying risks had not diminished. Kyle Rodda, a senior analyst at capital.com, noted that volatility had settled largely because of the energy market's steadiness, yet warned that control of the Strait—a critical chokepoint for global oil flows—remained contested, and any shift in that dynamic could trigger a sharp reversal in risk sentiment.

The week ahead would test whether this tentative return to risk appetite could hold. The Federal Reserve was set to announce its policy decision on Wednesday, with the European Central Bank, Bank of England, and Bank of Japan following a day later. All four institutions were expected to leave rates unchanged, but traders were hunting for any shift in language around inflation and economic outlook. The geopolitical crisis had already reshaped rate expectations: markets were now pricing in roughly 25 basis points of Fed cuts for the full year—a sharp pullback from earlier forecasts—while pricing in nearly two rate hikes from the ECB in 2026, a dramatic reversal from the roughly 50% probability of a cut that had been priced in before the conflict began.

Trump's decision to postpone a planned trip to Beijing from March 31 to April 2 underscored how the crisis was upending not just markets but diplomacy itself. The postponement of what would have been his first visit to China during his second term signaled the weight the administration was placing on Middle East developments. Elsewhere, the Australian dollar gained 0.06% to $0.7106, while New Zealand's kiwi slipped 0.02% to $0.5856. In cryptocurrencies, bitcoin fell 0.48% to $74,193.50 and ether declined 0.04% to $2,327.66. The question hanging over markets was whether this window of relative calm would persist through the central bank announcements, or whether the underlying geopolitical tensions would reassert themselves and send investors scrambling back to the safety of dollars and government bonds.