The US dollar was little changed on Wednesday as investors monitored the latest developments between the United States and Iran while awaiting key US inflation data that could provide important clues about the future path of Federal Reserve interest rates.

US forces launched strikes against Iranian targets after President Donald Trump vowed on Tuesday to respond to the downing of a US Apache attack helicopter, marking a new escalation that threatens the fragile ceasefire between Washington and Tehran.

Meanwhile, Irans Revolutionary Guard announced missile and drone attacks targeting US military bases in Jordan, Kuwait, and Bahrain in retaliation for US strikes on Iranian positions near the Strait of Hormuz.

The US Dollar Index, which measures the greenback against a basket of major currencies including the euro and the yen, edged slightly lower to 99.88.

The euro rose about 0.1% to $1.1553, while the British pound gained a similar amount to $1.3386.

Dominic Bunning, Head of G10 FX Strategy at Nomura, said markets still view the chances of a negotiated settlement between the United States and Iran as greater than the likelihood of a full-scale escalation, despite the renewed tensions in the short term.

Markets focused on Fed policy amid geopolitical risks

Bunning added that investors remain focused on US economic data and interest-rate expectations, particularly following the appointment of Kevin Warsh as Federal Reserve Chair.

He noted that markets may eventually need to move beyond the current wait-and-see approach, adding that many investors still believe the dollar could extend its strength if US economic data continues to show resilience.

US inflation and the Japanese yen in focus

Investors are awaiting the release of the US Consumer Price Index for May later on Wednesday, a report widely viewed as critical in assessing the likelihood of additional Federal Reserve rate hikes this year following last weeks stronger-than-expected jobs report.

Sho Suzuki, market analyst at Matsui Securities, said stronger US inflation would reinforce expectations for higher interest rates and provide additional support for the dollar.

Japanese yen

In Asia, the Japanese yen remained a key focus as markets have almost fully priced in a Bank of Japan rate hike at its June 16 meeting. As a result, the decision alone may not be enough to reverse the yens weakness unless it is accompanied by a more hawkish message from Governor Kazuo Ueda.

Tony Sycamore, market analyst at IG, said investors need clearer signals from Ueda that the next rate increase could be brought forward from December to September, with the possibility of a third hike before year-end, for the yen to stage a meaningful recovery.

He added that Japans Ministry of Finance may be forced to intervene again in the currency market if the yen continues to weaken.

The Japanese currency was little changed at 160.36 per dollar, remaining close to the 160 level that investors widely regard as a potential trigger point for official intervention.

A Reuters survey of economists showed expectations that the Bank of Japan will raise its benchmark interest rate this month and again in the fourth quarter, lifting borrowing costs to 1.25% by the end of the year as policymakers grow increasingly concerned about inflation risks.

Data released on Wednesday also showed that Japans wholesale inflation accelerated to a three-year high of 6.3% in May compared with a year earlier, driven by broader price pressures linked to the conflict in the Middle East.