The US Dollar index edged lower on Wednesday, ending a four-day rally as investor sentiment turned cautious ahead of the upcoming Federal Reserve policy meeting.

This followed heightened market volatility triggered by the US-EU trade agreement earlier in the week.

At the same time, the Euro was on track to log its first monthly decline since December 2024.

The Japanese Yen strengthened against the Dollar after a powerful earthquake off Russia's Kamchatka Peninsula sparked a tsunami and led to evacuation alerts along much of Japan’s eastern coastline.

Currency markets remained largely stable as investors held off on making major moves ahead of key economic data releases and upcoming central bank meetings in Canada, Japan, and the United States.

“Markets will be paying attention to (Fed Chair) Jerome Powell’s remarks, regarding any signs of internal dissent within the committee and the chair’s stance amid ongoing tensions with the White House,” stated Julien Lafargue, chief market strategist at Barclays Private Bank and Wealth Management.

“A rate cut in September remains a strong base case, much will depend on incoming data, starting with the US jobs report due this Friday,” he went on to say.

The Federal Reserve is widely expected to keep interest rates steady in its decision on Wednesday.

Analysts pointed out that the selloff in US assets, including Treasuries and the Dollar, began back in early April when the US seemed on the verge of initiating a trade war with key allies, Reuters reports.

Recent trade deals with Japan last week and the European Union over the weekend signalled a renewed US commitment to global cooperation, helping to calm investor nerves.

Attention has now shifted to ongoing US-China negotiations, after both sides agreed to explore extending their 90-day tariff truce. This follows two days of what officials described as constructive discussions in Stockholm.

Elsewhere, the Euro edged up 0.15% to $1.1562 on Wednesday, rebounding after two days of declines that saw it fall to a one-month low of $1.15185 on Tuesday.

Despite gaining 11.9% since the beginning of the year, the single currency is on track for its first monthly decline in 2025.

Some analysts voiced concerns over the potential economic fallout from tariffs and how they might influence the European Central Bank’s interest rate trajectory.

However, following the US-Japan trade agreement and a more hawkish tone from the ECB after its recent policy meeting, markets recalibrated their expectations, delaying the anticipated start of rate cuts to March 2026.

“On a comparative basis, the outcome (of trade negotiations) is welcome, if not wholly reassuring (for the euro area),” said Modupe Adegbembo, economist at Jefferies.

“The EU has successfully avoided escalation and has not lost significant ground relative to other major exporters,” he added.

Furthermore, ECB policymaker Gabriel Makhlouf acknowledged that the newly imposed 15% US tariffs on EU goods are likely to weigh on eurozone economic growth compared to expectations from six months ago.

However, he noted that the decreased risk of a full-blown trade war would help cushion some of the negative impact.

Meanwhile, the Dollar index slipped 0.13% to 98.774, after reaching a five-week high of 99.143 on Tuesday. Despite the dip, it remains on track for its first monthly gain of the year.