Sterling and euro steadied ahead of British government's budget announcement later on Wednesday and the European Central Bank's looming interest rate hike on Thursday.

The dollar was also stabilising as fear of a banking crisis ebbed and investors dialled back bets on U.S. rate cuts.

Sterling edged 0.11% lower at $1.2146 against the dollar and flattened at 88.24 against the euro with finance minister Jeremy Hunt due to make a budget speech to parliament at around 1230 GMT. Hunt is expected to announce how he will try to prop up the world's sixth-biggest economy.

"We doubt anything in the Budget will be sterling negative - after all taxation levels are near the limit - but equally we do not see it as especially sterling positive either," said Chris Turner, global head of markets at ING.

The euro touched a month high $1.0760 before drifting back to flat at $1.0730, ahead of the ECB meeting.

Markets are pricing in a 90% chance of a 50 basis point hike in euro zone rates, a bigger increase than traders expect from the U.S. Federal Reserve next week.

 

SVB JITTERS EBB

The dollar rose 0.16% to 134.45 yen, even as wage talks in Japan delivered the biggest pay increases in a quarter century which are likely to pressure monetary policy settings there.

Banking stocks bounced and bonds and interest rate futures have given back some of the huge gains they logged following the collapse of three U.S. banks in a matter of days.

The moves suggest the immediate fears of contagion in the U.S. banking system have subsided following the failure of Silicon Valley Bank (SVB) last week.

Interest rate futures pricing now implies an 80% chance of a 25 basis point U.S. rate hike. A week ago markets priced a similar chance of a 50 bp hike, but earlier this week, crisis fears had traders pricing a 50% chance of a hold.

"When all the dust clears I think we'll end up with a dollar not being quite as strong and the flow of data will probably resume the centre stage," Westpac strategist Imre Speizer said.

"I think we end up with a lower Fed peak than was priced a week ago and all else equal that should result in the U.S. dollar being a bit weaker than where it was a week ago."

U.S. consumer prices also increased solidly in February, keeping the pressure on policymakers to contain inflation.

The strong performance this week, however, for the safe-haven Swiss franc, which rose about 3% in a week, shows the elevated levels of concern in markets.

 

(Reporting by Joice Alves in London and Tom Westbrook in Singapore; Editing by Tomasz Janowski)