The U.S. dollar retreated on Wednesday as markets reacted to ongoing geopolitical tensions in the Middle East, signs of a slowing U.S. economy, and the conclusion of the Federal Reserve’s policy meeting.

By 04:35 ET (08:35 GMT), the U.S. Dollar Index — which measures the greenback against a basket of six major currencies — was down 0.2% at 98.240, giving back part of Tuesday’s 0.6% gain.

Dollar Retreats Ahead of Fed Outcome

The greenback had seen safe-haven demand a day earlier as the escalating conflict between Israel and Iran spooked markets. U.S. President Donald Trump’s aggressive rhetoric — including demands for Iran’s “unconditional surrender” and claims that Supreme Leader Ayatollah Khamenei was an “easy target” — added fuel to the risk-off mood. Trump also suggested U.S. support in helping Israel achieve “complete and total” air superiority over Iran.

According to analysts at ING, Tuesday’s surge in the dollar was likely driven by a short squeeze and rising oil prices following intensified Israeli strikes on Tehran. They warned that if speculation about U.S. military involvement proves accurate, it could drive oil even higher — potentially strengthening the dollar further.

Still, traders pulled back on Wednesday ahead of the Fed’s widely anticipated decision. No rate change is expected, but investors will closely scrutinize Fed Chair Jerome Powell’s remarks and the updated “dot plot,” which outlines policymakers’ rate forecasts.

Market expectations currently price in slightly over a 50% chance of the next rate cut occurring in September. However, recent U.S. data — including a surprise economic contraction and weaker-than-expected May retail sales — have cast doubt on the strength of the recovery.

Euro and Pound Rebound

In Europe, the euro bounced back, with EUR/USD rising 0.3% to 1.1515, recovering from a 1% drop the previous day. Investors await the final reading of May’s eurozone inflation, though little change is expected from the earlier 1.9% annual increase.

Despite overbought technical conditions, ING noted that bearish structural sentiment toward the dollar could keep dip-buying in EUR/USD intact, at least until markets fully absorb the geopolitical impact on oil prices.

The British pound also gained, with GBP/USD up 0.2% at 1.3463, even as U.K. inflation data softened. Headline inflation slowed to 3.4% in May, down from 3.5% in April, while services inflation — key for the Bank of England — fell to 4.7% from 5.4%.

The BoE is expected to hold rates steady on Thursday, following a 25bps cut earlier in May. ING pointed out that despite the BoE’s hawkish messaging, recent data on jobs, growth, and inflation have all been weaker — increasing the risk of a more cautious tone, though another rate cut remains unlikely at this stage.

Swedish Krona Weakens on Riksbank Cut

USD/SEK rose 0.2% to 9.5677 after Sweden’s Riksbank cut its benchmark interest rate by 25bps to 2.0% — its lowest level in over two years — in response to slowing inflation and growth concerns.

Muted Trade News in Asia

In Asia, USD/JPY edged down 0.1% to 144.58 after Japanese Prime Minister Shigeru Ishiba said no trade deal had been reached with the U.S. during the G7 summit. Ishiba cited ongoing disputes and noted that U.S. tariffs continued to hurt Japan’s auto sector.

Trade data showed Japan ran a smaller-than-expected deficit in May, with exports falling for the first time in eight months — though the drop was milder than forecast.

USD/CNY was little changed at 7.1852 as markets awaited a decision from the People’s Bank of China later in the week. The central bank is expected to hold its loan prime rate steady after a previous cut earlier this year.