By Stefano Rebaudo

(Reuters) -The dollar edged down but was near 5-1/2-month highs on Wednesday as Federal Reserve officials reiterated the rate-cutting cycle was on hold pending new economic data, while the pricing of the monetary easing outlook for G10 central banks was roughly unchanged.

Top U.S. central bank officials including Fed Chair Jerome Powell backed away on Tuesday from providing any guidance on when interest rates may be cut, saying instead that monetary policy needed to be restrictive for longer.

Recent data suggested that the U.S. economy was on a different track compared with the Fed's forecasts, leading investors to reduce their bets on future rate cuts. Meanwhile, risks of a broadening Middle East conflict added to the dollar's short-term appeal as a safe-haven asset.

Some analysts said they were still bullish on the greenback at the current levels.

"On any escalation of the Middle East crisis, we would expect the U.S. dollar to benefit from safe-haven flows," said Jane Foley, senior forex strategist at Rabobank, confirming the target for the euro/dollar at 1.05.

The U.S. and its allies planned fresh sanctions against Iran over its unprecedented attack on Israel, seeking to dissuade Israel from a major escalation as its war cabinet was set to meet again on Wednesday to decide a response.

Bank of America revised last week its call for Fed monetary easing to start in December this year or later, instead of June, and argued the greenback would strengthen even more if markets price out the Fed cuts for this year.

However, "with hedge funds' net U.S. dollar longs at their highest post-COVID level, a stronger U.S. dollar from here would likely rely more on real money clients", said Michalis Rousakis, forex strategist at BofA.

Against a basket of currencies, the dollar was last down 0.2% at 106.12, just shy of the five-month peak of 106.51 touched on Tuesday. The index is up 4.8% for the year.

The dollar was lower versus the euro at $1.0643 on Wednesday, not far from the 5-1/2-month high of $1.06013 it touched on Tuesday.

"As the market is still discounting almost two (Fed) cuts this year, the risk is for a hawkish repricing (of the Fed policy path) in the coming weeks," said Olivier Korber, strategist at SG Markets. "This could pressure below 1.05."

Traders now anticipate 40 basis points (bps) of cuts in 2024, drastically lower than the 160 bps of easing they priced for at the start of the year.

European Central Bank policymakers continued to make the case for an interest rate cut in June on Tuesday as inflation remains on course to ease back to 2% by next year, even if the path for prices still proves bumpy.

YEN WORRIES

The yen last hovered just below 154.79 per dollar, its weakest level in 34 years.

Market participants raised the bar of a possible intervention by the Bank of Japan (BOJ) to prop up the Japanese currency, now mentioning the 155 level from the previous 152, even if they believed the BOJ could step in at any time.

They flagged that the latest fall in the Japanese currency was in line with fundamentals, reflecting the pricing of Fed policy, and that authorities were analysing not just the recent yen declines but factors that were driving the moves.

"We think that the potential for BoJ to intervene to bolster the yen appears less evident, given that the dollar is strengthening on a relatively more hawkish Fed," said Yvan Berthoux, forex strategist at UBS Investment Bank.

Market participants believe that as long as the fall in yen is gradual and led by fundamentals, the probability of a BOJ intervention is low.

"Rhetoric from officials has been more focused on speed of a move rather than levels themselves," said Kieran Williams, head of Asia FX at InTouch Capital Markets.

Japan last intervened in the currency market in 2022, spending an estimated $60 billion to defend the yen.

Hedge funds have built up their biggest bet against the yen in 17 years, raising the prospect that when Japan's embattled currency does rebound, the short-covering rally could be a powerful one.

The dollar's strength has cast a shadow across the currency market, with emerging markets in Asia scrambling to stem the decline in their currencies, with the prospect of rate cuts this year in the region swiftly evaporating. [EMRG/FRX]

Bank of Korea Governor Rhee Chang-yong said the central bank was ready to deploy measures to calm the market, while Indonesia's central bank is continuing to intervene in the foreign exchange market ahead of its policy meeting next week.