The dollar remained subdued on Wednesday after a broad retreat overnight ahead of policy decisions by both the Federal Reserve and Bank of Japan, while the Australian dollar tumbled after data showed core inflation unexpectedly slowed to the lowest on record.

The Fed is considered certain to keep rates steady when its policy meeting ends later in the global day, so the focus rests on the tone of its statement and any clues it offers as to when interest rates will rise.

Policy tightening

Traders said policymakers may be wary of sending too strong a message of an imminent policy tightening, particularly after another batch of disappointing data.

“I think the Federal Reserve is getting nervous about tightening,” Byron Wien, vice chairman of Blackstone Advisory Partners, part of investment and advisory firm Blackstone Group LP, told reporters at a roundtable event on a visit to Tokyo.

“They tightened in December, and said they would tighten four times in 2016. They passed on a March increase, and I think they'll only raise interest rates once, probably in June,” he said.

Any hints that an interest rate hike might be delayed would leave the dollar vulnerable to more weakness against the euro and yen. While dollar bulls fear the Fed will sound dovish again, a rise in US Treasury yields to five-week highs suggested some investors expected a more hawkish tone.

BOJ meet

Hours after the Fed, the BOJ will step up to the plate on Thursday in Asia.

Many market players expect the BOJ to take some form of easing measures, including an increase in purchase of stocks and a cut in interest rates, though many say this meeting will be a close call.

The greenback edged down about 0.2 per cent to 111.08 yen though it remained above its overnight low of 110.67.

Against the yen, the common currency scaled a three-week peak of 125.98 overnight but was last down about 0.2 per cent at 125.57.

The euro edged down about 0.1 per cent to $1.1297, but remained above a nearly four-week trough of $1.1216 set on Monday.

Dollar index

The dollar index, which tracks the US unit against a basket of six major rivals, edged down 0.1 per cent to 94.504.

Sterling, which climbed to a near three-month high of $1.4640 on Tuesday, last stood at $1.4570.

Australian dollar

The Australian dollar, meanwhile, skidded 1.5 per cent to $0.7632, plumbing $0.7623 earlier, after data showed Australia’s consumer prices unexpectedly fell 0.2 per cent in January-March, undershooting median forecast of a 0.3 per cent rise, while core inflation was slower than expected.

It was the first time since 2009 the inflation gauge fell to a negative level, raising speculation that the Reserve Bank of Australia may have to consider rate cuts.

“The underlying rate of inflation has slowed considerably and Australia's CPI rates are finally starting to look more like its developed market peers. This won't sway the RBA to lower the cash rate next Tuesday, but it will keep their easing bias in play for a while,” said Jasmin Argyrou, Aberdeen Asset Management senior investment manager in Sydney.

The Aussie had risen almost 15 per cent earlier this month from its near seven-year low touched in January, thanks to recovery in commodity prices, but rising expectations of a rate cut could halt the rally.

“The RBA has been nervous about a strength in the Australian dollar. So a rate cut would be a natural option. The Aussie's rally could reverse its course,” said Yukio Ishizuki, forex strategist at Daiwa Securities.

“On the other hand, iron ore prices have surged this year, so given their correlation, that should prevent the Aussie from falling fast,” he added.

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