US Dollar drifts lower ahead of Fed decision as Middle East tensions persist

• The DXY US Dollar Index trades slightly lower on Wednesday as traders await the Federal Reserve's rate verdict.
• The Fed is widely expected to keep the benchmark interest rate unchanged at 4.25-4.50%, but traders will be watching for policy clues.
• Safe-haven flows support the US Dollar amid escalating Iran-Israel tensions, partially offsetting recent macroeconomic data and tariff worries.

The US Dollar Index (DXY), which measures the value of the Greenback against a basket of six major currencies, is trading slightly lower on Wednesday after gaining about 0.7% the previous day. Traders remain cautious ahead of the Federal Reserve's (Fed) interest rate decision due 18:00 GMT, which could set the tone for the US Dollar's next move.

The DXY is treading water, hovering just below Tuesday's high and its 21-day Exponential Moving Average (EMA). At the time of writing, the index is trading around 98.60, with an intraday high of 98.88, as traders hold back from placing aggressive bets.

Although the US Dollar Index remains broadly pressured by lingering concerns over fresh tariffs, it has regained some safe-haven appeal amid the escalating conflict between Iran and Israel. Heightened geopolitical tensions have prompted investors to seek shelter in the Greenback, helping the DXY stage a modest recovery from near a three-year low.

The US Dollar has also resumed its role as a defensive asset, having gained about 1% against both the Japanese Yen (JPY) and the Swiss Franc (CHF) since last Thursday. However, on Wednesday, the Greenback pauses its advance, easing slightly against the Yen and the Franc and posting more noticeable losses versus the Euro (EUR) and the Pound Sterling (GBP), as market participants await clearer signals from the Fed's policy update.

Meanwhile, recent US data has offered mixed signals on the health of the economy. The Empire State Manufacturing Index tumbled to -16 in June, marking a deeper contraction in regional factory activity, while Retail Sales dropped by 0.9% in May -- the steepest fall in four months -- as consumers reined in spending ahead of possible new tariffs. However, the Retail Sales Control Group increased by 0.4%.

Industrial Production also slipped by 0.2% in May, underscoring persistent weakness in manufacturing.

Looking ahead, traders will scrutinize the Fed's policy statement and Chair Jerome Powell's remarks for any hints about the timing and pace of potential rate cuts in the second half of the year. Any dovish tilt could put renewed downward pressure on the DXY, while a more cautious or hawkish tone might help the index hold its ground near current levels.