By Rae Wee and Siddarth S
SINGAPORE, July 29 (Reuters) - The U.S. dollar paused for breath on Wednesday, but held near one-month highs, as investors awaited a Federal Reserve interest rate decision later in the day, where some analysts believe there is a growing risk of a surprise hike.
Hostilities in the Middle East flared anew, sending oil prices higher, after joint strikes by U.S. and Saudi Arabia on Iran-backed groups in Iraq on Wednesday.
The strikes came hours after the U.S. military said it averted
a surprise Iranian attack on U.S. troops in the region.
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.
"We have seen a breakdown in that tentative ceasefire in the Middle East overnight, tit-for-tat strikes between the U.S. and Iran, (sending) oil higher. And despite that, FX (is) really not seeing very much movement so far this morning," said Nick Rees, head of macro research at Monex Europe.
The dollar index, which tracks the U.S. currency against a basket of six others, eased 0.08% to 101.33. It rose to 101.63 on Tuesday for the first time since June 25.
The euro was nursing losses after falling to a one-month low in the previous session and inched up 0.09% to $1.1395.
Sterling edged 0.06% higher to $1.3298, but remained near its weakest level since July 1.
FED DECISION IN FOCUS
While the U.S. central bank is widely expected to keep rates unchanged, limited guidance from Chair Kevin Warsh, coupled with higher oil prices due to the re-escalation of tensions in the Middle East has prompted a growing number of brokerages to pencil in the risk of a surprise rate hike.
"We're going into this meeting with a round of one-in-three chance for a rate hike priced in. First time we've seen pricing like that for a while. There is genuine uncertainty around this meeting, and I would expect that to lead to some volatility on the outcome, whichever way it breaks," Rees said.
The yen strengthened 0.18% to 163.55 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."
Bitcoin rose about 0.7% to $64,313.05, while ether was down 0.12% to $1,914.20.
(Reporting by Rae Wee in Singapore and Siddarth S in Bengaluru; Editing by Christopher Cushing, Shri Navaratnam, Kevin Buckland, Amanda Cooper and Mrigank Dhaniwala)
