Markets prepare for the Federal Reserve's interest rate hike, Asian foreign exchange is quietly lower, and the dollar is sluggish

On Wednesday, most Asian currencies retreated in cautious trading as markets braced for a possible rate hike by the Federal Reserve later in the day, even as fading fears of a banking crisis sent regional currencies edging lower.

With inflation still well above the central bank's target rate, the Fed is expected to raise interest rates by 25 basis points. The market has a more than 80% chance of the bank raising rates later in the day, according to federal funds futures prices.

But the dollar saw limited support on Wednesday, with the dollar index and dollar index futures edging lower amid uncertainty about the Federal Reserve's monetary policy outlook. Both also traded near their lowest levels in five years.

Treasury yields rose on Wednesday, but trading volumes were well below the highs reached earlier this year.

While fears of a banking crisis appear to have eased, further increases in interest rates could put more lenders at risk, which in turn would limit the Fed's ability to tighten policy. But before the banking crisis, Powell had advocated a hawkish stance for the central bank amid high inflation and a strong labor market.

The central bank also launched emergency liquidity measures to stem a broader crisis, which has largely undermined its monetary tightening over the past year.

The Federal Reserve will announce its interest rate decision by 14:00 EST (18:00 Beijing time), and an hour later, Chairperson Jerome Powell will hold a press conference.

Rising interest rates still bode ill for Asian currencies, however, as the gap between risky and low-risk debt narrows. Regional units have been hit hard by the Federal Reserve's rate hike to 2022.

The yuan fell less than 0.1 percent on Wednesday as the daily fix set by the People's Bank of China was slightly stronger, while the Taiwan dollar and South Korean won fell 0.2 percent and 0.3 percent, respectively.

The yen was flat but trading near a one-month high against the dollar, having benefited from increased safe-haven demand over the past week.

Riskier currencies in South East Asia fell the most, with the Philippine peso down 0.4 percent.