By Stefano Rebaudo and Ankur Banerjee

(Reuters) -The greenback edged down however was nonetheless inside placing distance of its 5-1/2-month excessive on Wednesday, maintaining the yen rooted close to 34-year lows after Federal Reserve officers reiterated rates of interest are prone to keep larger for longer.

High U.S. central financial institution officers together with Fed Chair Jerome Powell backed away on Tuesday from offering any steering on when rates of interest could also be lower, saying as an alternative that financial coverage must be restrictive for longer.

Current knowledge advised the U.S. financial system was on a unique monitor to that which the Fed had forecast, which led buyers to chop their bets on future charge cuts. Dangers of a broadening Center East battle added to the greenback’s short-term enchantment as a safe-haven asset.

Analysts mentioned they had been nonetheless bullish on the buck on the present ranges.

“On any escalation of the Center East disaster, we might count on the U.S. greenback to learn from safe-haven flows,” mentioned Jane Foley, senior foreign exchange strategist at Rabobank, confirming the goal for the euro greenback at 1.05.

The U.S. and its allies deliberate recent sanctions towards Iran over its unprecedented assault on Israel, looking for to dissuade Israel from a significant escalation as its warfare cupboard was set to satisfy once more on Wednesday to resolve a response.

BofA revised final week their name for Fed financial easing to start out in December this yr or later, as an alternative of June, and argued the buck will strengthen much more if markets worth out the Fed cuts for this yr.

The greenback was barely decrease versus the euro at $1.0628 on Wednesday, not removed from the five-and-half-month excessive of $1.06013 it touched on Tuesday.

Towards a basket of currencies, the greenback was final at 106.22, simply shy of the five-month peak of 106.51 touched on Tuesday. The index is up 4.8% for the yr.

“Because the market continues to be discounting nearly two (Fed) cuts this yr, the danger is for a hawkish repricing (of the Fed coverage path) within the coming weeks,” mentioned Olivier Korber, strategist at SG Markets.

“This might strain under 1.05.”

Merchants now anticipate 40 foundation factors of cuts in 2024, drastically decrease than the 160 bps of easing they priced for at first of the yr.

European Central Financial institution policymakers continued to make the case for an rate of interest lower in June on Tuesday as inflation stays on the right track to ease again to 2% by subsequent yr, even when the trail for costs nonetheless proves bumpy.

YEN WORRIES

The yen final hovered just under 154.79 per greenback, its weakest degree in 34 years.

Market individuals raised the bar of a doable intervention by the Financial institution of Japan (BOJ) to prop up the Japanese forex, now mentioning the 155 degree from earlier 152, even when they believed the BOJ might step in at any time.

They flagged that the most recent fall within the Japanese forex was in keeping with fundamentals, reflecting the pricing of Fed coverage, and that authorities had been analysing current yen declines however even elements driving the strikes.

“Whereas the refrain of Japanese officers verbally intervening in JPY has elevated with greenback/yen marching larger since U.S. CPI final week, rhetoric from officers has been extra targeted on velocity of a transfer moderately than ranges themselves,” mentioned Kieran Williams, head of Asia FX at InTouch Capital Markets.

Japan final intervened within the forex market in 2022, spending an estimated $60 billion to defend the yen.

Hedge funds have constructed up their largest guess towards the yen in 17 years, elevating the prospect that when Japan’s embattled forex does rebound, the short-covering rally might be a robust one.

The greenback’s power has forged a shadow throughout the forex market, with rising markets in Asia scrambling to stem the decline of their currencies, with the prospect of charge cuts this yr within the area swiftly evaporating. [EMRG/FRX]

Financial institution of Korea Governor Rhee Chang-yong mentioned the central financial institution was able to deploy measures to calm the market, whereas Indonesia’s central financial institution is continuous to intervene within the international trade market forward of its coverage assembly subsequent week.