The dollar was pinned near five-week lows

The dollar fell to a five-week low ahead of the U.S. Federal Reserve’s policy meeting as investors await the central bank’s path amid global banking volatility.

Investors are interested in whether the Fed will continue fighting sticky inflation or pause interest rate hikes amid recent challenges among banks, including bankruptcies and last-minute bailouts.

The U.S. dollar index stood at 103.19, rising above the five-week low of 102.98, which it reached the previous night. The euro reached approximately five weeks’ worth of its highest value at $1.0788 the previous night, currently at $1.0770.

According to the CME FedWatch tool, markets assign approximately a 14.9% probability that the Fed will not raise rates and an 84.5% probability of a 25 basis point rate increase. The market had a 24% probability of increasing by 50 basis points one month ago.

Market volatility persists amid fragile investor sentiment

Investor apprehension was still strong due to worries about the future of the banking sector, which had started to decrease after the wild changes in stock prices in the past weeks caused by the collapse of a major U.S. bank in the first half of the month and the rescue of Credit Suisse Group AG over the weekend.

Markets seem to be easing into the idea that the authorities have probably done enough to avert a systemic banking problem. It may be early days, but price action over the past 48 hours indicates a shift in investor sentiment.

The Fed’s meeting ends Wednesday with the release of a policy statement, followed by a press conference by Chairman Jerome Powell half an hour later.

The Fed faces a tough choice with a strong labor market, and a February inflation rate higher than many market watchers had expected. Such circumstances would typically be ripe for a 50 basis point hike if not for concerns about financial stability.

The yen had appreciated 0.05% to 132.46, with the British pound also climbing 0.16% to 1.2233. The Australian dollar saw an increase of 0.36%, bringing it up to $0.6694, while the New Zealand dollar experienced a small uptick of 0.11%, settling at $0.6198.