Global financial markets were feeling the effects of combined Greek and Fed uncertainty, as the dollar advanced against the Japanese currency in Asia trade on Tuesday and European shares hit an almost four-month low.
The dollar was up about 0.2 percent versus the yen on the day at 123.58 yen on Tuesday, with yields on lower-rated eurozone sovereign debt hiking to their highest in anticipation of the outcome of the US Federal Reserve's two-day policy meeting and amid concerns of a Greek debt crisis.
Investors will be looking for timing clues in Fed Chair Janet Yellen's quarterly news conference on Wednesday following the Fed meeting.
The euro slid about 0.1 percent on the day to $1.1275, with investor confidence dented over Athens' inability so far to reach a deal with its lenders to avert a default.
Greece and its creditors stuck to their positions on Tuesday after the talks collapsed at the weekend, with the EU commissioner Guenther Oettinger saying the time had come to prepare for a "state of emergency."
The deadlock may be broken at the eurozone finance ministers' meeting on Thursday, as Greece’s 1.6-billion-euro repayment to the IMF through the end of this month.
Germany's DAX, France's CAC and stock markets in Italy and Spain shed between 0.7 - 1.5 percent, extending their losses over the last few weeks to between 6 and 8 percent, in anticipation of a possible Greek default. Britain's FTSE was down 0.5 percent.
Expectations of divergence in monetary policy between the US and Japan continue to favour the dollar over the yen, according to analysts. The Bank of Japan is expected to expand its monetary stimulus in October, according to recent polls.
On the other hand, a positive US employment report in May as well as a rise in wage inflation has increased speculation that the Fed may begin raising interest rates as early as September.
However, policymakers can choose not to follow a tight monetary policy with US data on Monday showing industrial production fell in May, considered an indication that a strong dollar may be constraining economic growth. The IMF and the World Bank have already said they believe the Fed should delay hiking rates until 2016.
In the Turkish currency markets, the lira, which dropped as low as 2.7415 against the dollar on Tuesday morning trade amid concerns the nation may head for repeat elections, pared its losses in late trading.
The Turkish currency rose about 0.23 percent to 2.73 at 17:15 in Istanbul, following Prime Minister Ahmet Davutoglu’s statements that the governing Justice and Development Party (AK Party) was ready to negotiate with any party to form a coalition government. The AK Party failed to win the majority in the parliament in last week’s elections.
The lira lost 2 percent last week tumbling to a record of 2.8096 per dollar, due to statements from opposition parties balking at working with President Recep Tayyip Erdogan to form a government.