The euro jumped after the ECB`s governing council said it would hold an emergency meeting on Wednesday to discuss the recent sell-off in government bond markets, briefly distracting traders ahead of a much-watched Fed meeting.

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The European common currency rose as much as 0.7% against the dollar to $1.04945, following the announcement of the meeting, which comes after the spread between the yields of Germany and more indebted southern nations, particularly Italy, soared to its highest in over two years.

Italy`s 10-year bond yield slid 20 basis points to 4%, down from eight-year highs hit this week. It was set for its biggest daily fall since March 1.

The Italian-German 10-year yield spread tightened by 25 basis points.

"We have a little bit of relief in euro this morning because of the ECB, but, except for that, it is the dollar that is firmly in control," said Niels Ginnerskov Christensen, Chief Analyst at Nordea.

The higher euro meant the dollar index, which measures the greenback against major peers, edged down 0.37% to 104.90.

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The Federal Reserve policy meeting is due to conclude later on Wednesday, and markets are pricing in an 87% chance of an outsized 75 basis point interest rate hike as policymakers try to rein in rampant inflation.

Expectations picked up following media reports, first by the Wall Street Journal, that a bigger rate increase was on the cards, after data released last week showed the U.S. consumer price index surged 8.6% in the 12 months to May, the largest year-on-year increase in four decades.

The U.S. dollar had already been gaining ground in the past few months thanks to the Fed raising rates ahead of most other major central banks and has been given another leg up in recent weeks as investors seek safe havens fearing the economic impact of rapidly tightening financial conditions.

But with such a large interest rate increase already expected, the dollar may struggle to gain further after the Fed`s decision.

"Fed chair Jerome Powell will likely want to keep all options open for himself at tonight`s press conference and provide little in the way of news," Commerzbank FX and EM analyst Antje Praefcke said in a note.

"That in turn would not constitute any additional fuel for the dollar bulls as market expectations have already gone a long way."

Higher U.S. rates versus rock bottom Japanese yields have been weighing on the yen, which hit a new 24-year low of 135.60 per dollar in Asia-Pac trade.

It recovered in the course of the Asia day amid volatility in government bond markets, to as much as 134.53.

Sterling edged higher to $1.2040 after slumping to a 15-month low versus the dollar at $1.1934 the previous day, not helped by the possibility of a new referendum on Scottish independence. 

The Australian dollar, often seen as a proxy for risk appetite, is at $0.69135, edging up 0.6% from the previous day`s one-month low.

The Aussie is down 7.9% so far this quarter, which would be its worst quarter since the first three months of 2020 when the COVID-19 pandemic hit.

Bitcoin, another risk-friendly asset class, was down 4.7% at $21,038. It hit an 18-month low of $20,715 on Wednesday, also hurt by major crypto lender Celsius Network`s freezing of withdrawals earlier this week.