FOREX: US Dollar eases before Fed decision as Australian dollar drops on inflation data

The U.S. dollar paused its climb on Wednesday but held near a one-month high, as traders awaited a Federal Reserve interest rate decision later in the day.

Hostilities in the Middle East flared anew, sending oil prices higher, after the U.S. and Saudi Arabia launched strikes on Iran-backed groups in Iraq on Wednesday, saying they were responsible for drone attacks on Saudi oil facilities.

Moves in currencies were largely subdued as investors stayed on the sidelines ahead of the Federal Open Market Committee's decision, with markets pricing in a roughly 30% chance of a 25-basis-point hike. 0#USDIRPR

The dollar index =USD, which measures the currency against a basket of peers, eased 0.15% to 101.27. It touched 101.63 on Tuesday for the first time since June 25.

The euro EUR= was nursing losses after falling to a one-month low in the previous session, inching up 0.14% to $1.1401.

Sterling GBP= edged 0.06% higher to $1.3298, but remained near its weakest level since July 1.

"Going to the meeting itself, I think what's clear is that the Fed is shifting in a more hawkish direction," said Sim Moh Siong, a strategist at OCBC.

"We are expecting no Fed hike, but I think the messaging will be more important than the decision. So if the Fed stays on hold and provides a bit of a hawkish guidance, then I think the dollar is likely to stay supported."

The Australian dollar AUD= slid after data on Wednesday showed domestic consumer prices rose at a slower pace in the June quarter, reducing the chance of further rate hikes from the Reserve Bank of Australia. The Aussie AUD= was 0.28% lower at $0.6954.

The New Zealand dollar NZD= was up 0.06% at $0.5791.

The yen JPY= strengthened 0.3% to 163.38 per dollar, but remained not far from a 40-year low and kept traders on alert for potential intervention from Japanese authorities to shore up the ailing currency.

"There is a possibility that the FOMC's policy decision and the Chair's press conference could trigger a further strengthening of the dollar, pushing USD/JPY to 164," said Hirofumi Suzuki, chief FX strategist at SMBC.

"The likelihood of FX intervention appears significant, as Japanese financial authorities have stepped up their warnings. In terms of timing, if the yen depreciates further following the BOJ's Monetary Policy Meeting, that could provide a trigger for intervention."

-Reporting by Rae Wee; Editing by Christopher Cushing, Shri Navaratnam and Kevin Buckland/Reuters