The dollar eased on Wednesday as traders awaited cues on what comes next in the US-Israeli war on Iran with mixed messages on a resolution to the conflict keeping investor sentiment frail.
Global markets have been betting that US President Donald Trump will seek to end the conflict soon, but Trump has also repeatedly threatened to hit Iran hard over moves to stop the flow of energy supplies through the Strait of Hormuz.
The dollar, which surged as the war sent oil prices soaring, has given up some of those gains on hopes of a swift resolution, but analysts remain sceptical of the conflict ending soon.
"We expect the war to run for months, not weeks, while acknowledging the high level of uncertainty," said Kristina Clifton, senior currency strategist at Commonwealth Bank of Australia.
The euro firmed 0.18 percent to $1.163175, inching away from the three-month low it touched on Monday. Sterling was 0.25 percent higher at $1.3449. The yen was at 158.14 per US dollar, near a seven-week low touched earlier this week.
The dollar index, which measures the US unit against six other rivals, eased to 98.773, not far from the three-month top hit on Monday.
As the war stretched into its 12th day, the US and Israel traded air strikes with Iran's military across the Middle East.
The besieged Tehran government warned its state security forces were ready with "fingers on the trigger" to confront any revival of anti-government protests.
The fast-evolving developments have left traders grappling with how to best price the risk.
"Traders are largely sitting on their hands and waiting for further news and greater clarity so that risk can be priced more efficiently," said Chris Weston, head of research at Pepperstone.
Australian dollar soars on rate hike wagers
The Australian dollar has been the biggest mover in the currency market over the past two days, hitting its highest level since mid-2022 at $0.7182. It was last up 0.86 percent at $0.718.
Much of the Aussie's gains came after Reserve Bank of Australia Deputy Governor Andrew Hauser on Tuesday warned that the spike in oil prices would push inflation higher and add to pressure for a rate rise at its policy meeting next week.
"The war in the Middle East has had some large impacts on expectations for central bank interest rates," CBA's Clifton said.
"Since the war began at the end of February markets have either moved from pricing cuts to pricing hikes, or to pricing fewer cuts than previously."
Fed funds futures traders are now pricing in 39.7 basis points of cuts by year-end, indicating doubts over whether the US central bank will make a second 25-basis-point cut this year.
Markets have been pricing rate hikes from the European Central Bank over the past week, although policymakers said the central bank should take its time to reassess policy and stay on its present course for now.
Just two weeks earlier, investors expected the ECB to keep rates steady all year, with a small chance of a rate cut. The central bank has kept rates unchanged since June 2025.
A key focus for the market will also be US inflation data for February later on Wednesday. It is expected to show core consumer prices rose 0.2 percent during the month while headline prices were up 0.3 percent, according to economists polled by Reuters.
Meanwhile, oil prices have dropped after the Wall Street Journal reported on Tuesday that the International Energy Agency has proposed the largest release of oil reserves in its history.
