Dollar dips as traders wait on Fed; Aussie gains

“There's not really an overarching theme for markets... and I think it's going to stay that way at least until next week into the FOMC," said Shaun Osborne, chief FX strategist at Scotiabank. "We need to get a sense of what the Fed's thinking.” The ongoing US war with Iran has increased fears that oil-driven inflation could affect Fed policy. Fed funds traders see only a small chance of a hike next week, with the next interest rate increase expected in December.

Fed Chairman Kevin Warsh is also unlikely to hint at future moves. That said, "I think there will be at least some assessment from the markets about the likelihood of the timing of the rates going forward that will firm up next week," said Osborne. Investors are also worried about how long the AI trade can last. The dollar weakened last week despite data showing US consumer price inflation accelerated in September.

Optimism over the sector has supported the dollar by drawing capital into the US and lifting growth and inflation expectations. “US growth has been very much driven by the whole AI trade,” said Noah Buffam, FX strategist at CIBC Capital Markets. “That has also kept inflation above target, so it's been much more impactful for the US than other countries.” Some worries over the stock market eased after Elon Musk said on Tuesday that a merger of his two companies SpaceX and Tesla would be "a good idea" and SpaceX posted its first profit as a public company.

AI server maker Super Micro, meanwhile, forecast quarterly revenue and profit margins above Wall Street estimates. The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.14% to 101.65, with the euro up 0.01% at $1.1237. The euro has been weighed down by widespread anti-government protests in France and a worsening fiscal outlook. French 10-year borrowing costs reached 24-year highs on Wednesday.

"The French debt situation isn't tractable. They do need to go in and make proper adjustments on the fiscal side to get this debt level down to at least show the seriousness around the trajectory," said John Hardy, global head of macro strategy at Saxo in Copenhagen. French President Emmanuel Macron pledged to prevent a repeat of last weekend's riots and looting, as the Yellow Vest movement filed plans for a major Paris march on Saturday that will present the government with its next big test.

Elsewhere, the Australian dollar jumped after Reserve Bank of Australia Deputy Governor Andrew Hauser told a Citi conference that the inflation outlook looked "materially worse." The Aussie gained 0.41% versus the greenback to $0.7031. Sterling rose 0.16% to $1.34 after data showing UK inflation rose more than expected last month, which strengthened the case for a Bank of England rate increase in November.

Against the euro, the pound reached its strongest level in 17 months. The yen firmed 0.02% to 158.12 per dollar. Bank of Japan Deputy Governor Ryozo Himino said underlying inflation was close to the central bank's 2% target and financial conditions remained loose, signalling scope for higher borrowing costs. (Reporting by Karen Brettell; Additional reporting by Shashwat Chauhan and Kevin Buckland in Tokyo; Editing by Andrea Ricci and Nick Zieminski)