On Wednesday, the dollar experienced a decline while Treasury yields increased slightly, and global stock markets stabilized as traders assessed the likelihood of a significant interest rate cut by the Federal Reserve later in the day.

The U.S. dollar fell by 0.5% against the yen, settling at 141.68, which reversed approximately half of the gains made on Tuesday, when unexpectedly strong U.S. retail sales data suggested a reduced need for aggressive easing by the Fed.

In contrast, U.S. bond yields saw a modest rise. The 2-year Treasury yield, which is particularly responsive to short-term rate expectations, increased by 2.5 basis points to reach 3.617%.

Earlier this week, discussions about the Fed potentially initiating its easing cycle with a substantial 50 basis point cut gained traction following media reports hinting at more assertive measures.

Financial markets are currently anticipating a 25 basis point rate cut, with the probability of a 50 basis point cut rising to 61% by Wednesday, according to LSEG data, a significant increase from just 14% a week prior.

"We appreciate this discussion—everyone is focused on whether it will be 50 or 25, but what truly matters is that they convey to the market their intention to adopt a neutral stance by next summer," stated Samy Chaar, chief economist at Lombard Odier.

"The worst-case scenario would be a 25 basis point cut accompanied by a false sense of normalcy, suggesting that monetary policy still requires a restrictive approach."

European stock markets dipped by 0.3%, with technology and healthcare sectors being the most affected.

The MSCI index of global stocks remained unchanged after reaching a two-week high the previous day, just shy of an all-time peak.

Japan's Nikkei stock index initially rose by as much as 1.3% in response to the yen's overnight weakness but later reduced those gains to 0.5% as the currency strengthened.

Wall Street closed nearly unchanged on Tuesday, unable to maintain the early momentum that had driven the S&P 500 and Dow Jones to achieve record intraday highs. S&P 500 futures indicated a flat opening for Wednesday.

The euro appreciated by 0.2%, reaching $1.1132, while sterling increased by 0.35% to $1.3208 following data that revealed British inflation remained stable in August, although it rose in the services sector. This development has fueled speculation in financial markets that the Bank of England may opt to keep interest rates steady on Thursday.

Market participants are currently assigning only a 26% likelihood to a 25-basis point rate cut from the BoE on Thursday.

"Today's inflation figures do not provide any grounds for an unexpected cut tomorrow," stated Derek Halpenny, head of research for global markets EMEA at MUFG. "A more significant 50-basis point reduction from the Fed tonight could heighten speculation regarding a rate cut from the BoE."

In other markets, gold struggled to gain traction on Wednesday, remaining flat at $2,569 per ounce after retreating from its recent record highs.

Crude oil prices also experienced a decline after rising approximately $1 a barrel earlier in the day, amid escalating tensions in the Middle East.

U.S. crude futures fell by 1.4% to $70.22, while Brent crude futures decreased by 1.2%, trading at $73.83.