Currency markets took a breather on Wednesday, with traders cautious over United States President Donald Trump's efforts to bring an end to the war with Iran. While Trump told reporters at the White House the US was making progress in talks with Iran, Tehran denied that direct negotiations had taken place, keeping investors on edge.

The US dollar index, which measures the greenback's strength against a basket of six currencies, was last 0.13% higher at 99.317, with the euro little changed at $1.1603. The British pound was 0.16% weaker at $1.3388 as data showed that British consumer price inflation held at an annual rate of 3.0% in February, unchanged from January's rate. However, inflation is broadly expected to pick up as the war in the Middle East pushes up prices.

The subdued volatility contrasted with a pickup in equities and a fall in crude oil prices after Trump said on Tuesday the US was making progress in its efforts to negotiate an end to the war.

Read: Trump approval sinks to 36% as fuel prices surge amid Iran war

"For those reacting to every breaking headline around dialogue between the US and its allies and Iran, including speculation of high-level talks and temporary ceasefire proposals, an element of fatigue is now firmly setting in," said Chris Weston, head of research at Pepperstone Group Ltd in Melbourne.

Against the yen, the US dollar was up a slight 0.2% at 158.99, after the release of minutes from the Bank of Japan's January policy meeting showed many board members saw the need to keep raising interest rates without any specific pace in mind. The Australian dollar weakened 0.33% to $0.697 after the release of inflation data for February, which showed a 3.7% rise prior to the start of the US-Israeli war with Iran, a slightly slower pace than expected by analysts.

Although markets still anticipate no change in US interest rates this year, expectations of policy tightening are rising. Fed funds futures now imply a 26.1% chance of a 25-basis-point hike at the Federal Reserve's December meeting, compared to a 69.5% probability of a cut a week ago, according to CME Group’s FedWatch tool.

Read More: Global shares skid as oil surge threatens inflation shock

The Fed may need to keep interest rates steady "for some time" before further cuts are warranted, Fed Governor Michael Barr said on Tuesday, noting continued inflation above the Fed's 2% target and the risks posed by the conflict in the Middle East.

Bond markets rebounded after a volatile week, with the yield on the US 10-year Treasury bond down 3.4 basis points at 4.356%. "Higher oil prices added to expectations of increasing inflationary pressures and tighter monetary policy," analysts from Westpac wrote.

In cryptocurrencies, bitcoin climbed 1.6% to $71,202.33, while ether was up 1.2% at $2,174.14.