The dollar is nearing a five-year high against the yen ahead of the Fed, while the Australian dollar is weak due to China concerns

On Wednesday, the dollar traded near a five-year high against the yen as investors awaited a Federal Reserve policy decision against the backdrop of the Ukraine war and China’s surging COVID-19 cases. Treasury yields jumped ahead of the Federal Open Market Committee decision, boosting the dollar against its Japanese counterpart, with traders fully pricing in the first interest rate hike in three years and giving a 13 percent chance of a half-point increase.

The dollar was also near its highest level this month against the Australian dollar, as commodity prices fell from multi-year highs, as markets remained hopeful that Russia-Ukraine talks would lead to an end to hostilities. Australia’s currency was also under pressure as top trade destination China saw new COVID cases more than double to a two-year high on Tuesday, raising concerns about the rising economic costs of the disease’s zero-tolerance policies.

Meanwhile, the euro has resumed its recovery from a near-22-month low earlier this month. This contributed to the dollar index remaining stable around 99.0, after reaching a high of 99.415 at the start of last week. “Whether forlorn or otherwise, there does seem to be some enduring optimism (coming from) the fact that Russia and Ukraine are still talking,” said Ray Attrill, head of FX strategy at National Australia Bank, helping the euro to stabilize.

In terms of the greenback, “the bigger question will be that there’s a lot of historical evidence that the dollar peaks as soon as the Fed begins the tightening cycle, so there’s a lot of interest in whether what the Fed does turns out to be something of a watershed in terms of a peak,” Attrill said, with the dollar index peaking around 100. The dollar index was last at 98.880, slightly lower than on Tuesday. The euro rose 0.14 percent to $1.09695, up from a low of $1.08060 on March 7. The Australian dollar rose 0.08 percent to $0.72015 after falling to $0.71650 in the previous session for the first time since February 28.