The dollar rose on Wednesday on lingering concerns about the ongoing U.S.-Israeli war with Iran, after President Donald Trump extended the ceasefire to give Tehran more time to present a unified proposal for ending the conflict.

Iran seized two ships in the Strait of Hormuz on Wednesday, tightening its grip on the strategic waterway, after Trump called off attacks indefinitely with no sign of peace talks restarting.

Markets have been swayed by alternating bouts of optimism that a deal is within reach and fears that the conflict could drag on, causing prolonged disruptions to energy markets.

"It's tough to have a really strong conviction at this point," said Dominic Bunning, head of G10 FX strategy at Nomura. That said, "overall it seems like both sides are more inclined to make progress than to re-escalate."

The dollar index =USD, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.21% to 98.58, with the euro EUR= down 0.28% at $1.1709.

The Japanese yen JPY= weakened 0.04% against the greenback to 159.45 per dollar.

CENTRAL BANKS ON HOLD

Markets are pricing in low odds that the Federal Reserve will cut interest rates this year, given the risk that the war could fuel higher inflation.

Fed funds futures traders now see only a 28% chance of one cut by the end of 2026. Traders previously had forecast two cuts, with Kevin Warsh - Trump's nominee to lead the U.S. central bank - seen as more likely to ease than Fed Chair Jerome Powell.

Warsh said on Tuesday he had made no promises to Trump about cutting rates, seeking to assure senators considering his confirmation that he would act independently of the White House while pursuing broad reforms.

U.S. Treasury Secretary Scott Bessent said earlier this month that the Fed should "wait and see" before deciding whether to lower rates amid the war in Iran, noting that the U.S. economy had been "very strong" in January and February.

"Since the war began, comments from Treasury Secretary Bessent make it seem like he recognizes that it might take Warsh some time to cut interest rates," said Marc Chandler, chief market strategist at Bannockburn Global Forex.

"And this is what I think we're going to see next week. You've got five G10 central banks that meet and none of them are going to do anything. It's a 'watch-and-wait' situation," Chandler said.

The Fed, European Central Bank, Bank of Japan, Bank of England and Bank of Canada are all scheduled to hold policy meetings next week.

The ECB, BOJ and BoE are seen as likely to hike rates in June.

"After the agile response at the March meeting, where the ECB made it clear it has learnt from the 2021-22 experience, we expect the focus next week to shift towards the growth impact and medium-term core inflation. This should dampen any urgency to hike," Societe Generale economist Anatoli Annenkov said in a report on Wednesday.

In cryptocurrencies, bitcoin BTC= gained 4.24% to $78,956 and reached $79,481, the highest since January 31. Ethereum ETH= rose 3.5% to $2,398.75.

-Karen Brettell and Sophie Kiderlin/Reuters