The Japanese yen stabilized on Tuesday after initially rising following a split decision by the Bank of Japan to hold interest rates steady. Meanwhile, the U.S. dollar edged higher as markets focused on upcoming central bank guidance amid the ongoing impact of the war with Iran.

The yen was last seen trading slightly lower against the dollar at 159.63 and up marginally against the Euro at 186.75, retracing most of the gains made after three out of nine board members dissented, calling for a rate hike. In its quarterly outlook, the bank sharply raised core inflation forecasts for the fiscal years ending March 2027 and 2028, while lowering growth projections for both years.

During a press conference, Governor Kazuo Ueda kept the door open for future hikes but provided no clear timeline for policy shifts.

Takeshi Ishida, a strategist at Kansai Mirai Bank, noted: "The yen rose immediately after the meeting because the economic outlook leaned hawkish and three members dissented. Markets then waited cautiously for the Governors press conference, but it wasn't as hawkish as the statement suggested, causing the yen to pare its early gains."

The persistent weakness of the yen remains a concern for Tokyo. Earlier Tuesday, Finance Minister Satsuki Katayama warned speculators that volatility in crude oil futures is spilling into currency markets, adding that authorities are on high alert 24/7 to take decisive action.

In contrast, the U.S. Dollar Index rose 0.18% to 98.64, snapping a two-day losing streak.

While President Donald Trump discussed a new Iranian proposal to end the war with senior national security aides on Monday, a U.S. official later stated that Trump was dissatisfied as the proposal did not address Iran's nuclear program.

Despite rising oil prices fueled by doubts over a diplomatic solution, the dollar struggled to find strong momentum. Derek Halpenny, head of research at MUFG, pointed out that the resilience of U.S. equity marketsdriven by strong corporate earnings and AI-related optimismis offsetting some risks associated with higher energy costs and limiting dollar buying.

Markets are also eyeing Wednesdays Federal Reserve meeting. The central bank is expected to hold rates steady in what could be Jerome Powells final meeting before Kevin Warsh takes over in May, following the removal of legislative hurdles to Warsh's appointment.

Steve Englander, head of G10 FX research at Standard Chartered, said: "This meeting is less about a change in policy and more about the Fed's economic assessment. The inflation picture is improving very slowly, which will be a significant issue for Warsh to manage upon his arrival."

Other major central bank decisions from the Eurozone, the UK, and Canada are also expected later this week. The Euro fell 0.14% to 1.1704 dollars, while the British pound declined 0.17% to 1.3507 dollars.