The dollar was softer on Wednesday afternoon as markets looked nervously to the US Federal Reserve's next interest rate decision on Wednesday next week.
The euro was changing hands at USD1.0715 on Wednesday afternoon London time, higher against USD1.0672 at the same time on Tuesday.
Against the Swiss franc, the dollar was priced at CHF0.9060, down from CHF0.9090. Versus the Japanese yen, the dollar was trading at JPY139.59 in London, lower against JPY139.79.
Luca Santos, currency analyst at ACY Securities said the dollar is "struggling to find meaningful short-term direction" with the upcoming Federal Open Market Committee meeting approaching.
"Since Federal Reserve speakers are currently restricted from making public statements, and there are no major US economic indicators to analyse today, the foreign exchange markets might remain relatively stagnant until there is a clearer indication of the prevailing interest rate differentials or overall market sentiment," he explained.
The Fed will announce its decision on June 14. Markets see a 77% chance of the central bank holding rates steady, according to the CME FedWatch Tool, though a US inflation print released on June 13 may give the Fed pause for thought.
According to FXStreet-cited consensus, the annual inflation rate is expected to cool to 4.2% in May from 4.9% in April. Francesco Pesole at ING said the inflation reading was a "risk event" with the potential to "tilt the balance to a hike".
"We think markets will watch the Bank of Canada decision with great interest today. Following the Reserve Bank of Australia rate hike yesterday, another hawkish surprise from a developed central bank in the run-up to the [Federal Open Market Committee] meeting could cause the revamp of some hawkish speculation, especially considering Canada's economic affinity with the US," Pesole added.
The Bank of Canada announces its next interest rate decision at 1500 BST. According to ING, markets are attaching a 45% probability that a 25 basis point hike will be delivered.
"While admitting it's a rather close call, we think a hawkish hold is more likely, as policymakers may want to err on the side of caution while assessing the lagged effect of monetary tightening," Pesole said.
Against the Canadian loonie, the dollar traded at CAD1.3403, lower against CAD1.3430.
The BoC's decision comes a day after the Reserve Bank of Australia hiked interest rates to an 11-year-high on Tuesday and warned that further rises may be on the horizon to get surging prices under control.
The RBA lifted the key rate 25 basis points to 4.1%, its highest level since May 2012, with governor Philip Lowe saying inflation had "passed its peak" but was still stubbornly high.
Most analysts surveyed by Bloomberg had forecast officials to hold steady.
Versus the Australian dollar, the US currency was priced at AUD1.4954, down from AUD1.5037.
The European Central Bank will announce its own decision on Thursday next week. The Bank of England will follow a week later.
Markets are expecting both of the central banks to hike rates again amid stubbornly high inflation. At their last meetings, the ECB and BOE hiked rates by 25 basis points, respectively.
The pound was quoted at USD1.2457 on Wednesday afternoon, up from USD1.2378 on Tuesday afternoon. Against the euro, sterling was trading at EUR1.1625, up from EUR1.1619.
Elsewhere in the foreign exchange space, the Turkish lira sank to a new low against the dollar.
Against the dollar, the lira traded at TRY23.08 on Wednesday afternoon in London. Earlier in the day, the Turkish currency hit a low of TRY23.19.
The drop came after the re-election of President Recep Tayyip Erdogan.
Erdogan was sworn in on Saturday after winning a historic election runoff on May 28 and named a new cabinet appointing market-friendly politician Mehmet Simsek as finance minister.
Simsek is known to oppose Erdogan's unconventional policies. Soon after taking office, Simsek said: "we have no choice but to return to rational ground" – a sign of shifting away from the unorthodox policy of lowering interest rates in order to fight high inflation.
Liam Peach, senior emerging markets economist at Capital Economics, remarked: "If this is a real shift towards orthodoxy, credible steps need to be taken quickly. Among the first will be loosening policymakers’ grip on the currency. Various foreign currency restrictions and central bank interventions have been used to prop up the lira at an artificially strong level in recent months. These were successful ahead of the election, but have come with a cost: the central bank’s foreign exchange reserves have fallen to dangerously low levels and Turkey has lost a lot of export competitiveness."