US dollar advances broadly as Mideast tension rises

• US retail sales drop more than expected in May
• Dollar lifted, yen gives up earlier gains after of BOA decision
• BOA to slow balance sheet drawdown in fiscal 2026
• US boosts regional forces, Mid East tensions keep markets on edge
• Trump calls for Iran's unconditional surrender

NEW YORK, June 17 (Reuters) - The U.S. dollar advanced against major currencies on Tuesday, including the euro and the yen, as softer U.S. economic data and geopolitical tensions in the Middle East following an Israeli attack on Iran kept investors on edge ahead of the Federal Reserve's decision on interest rates on Wednesday.

The U.S. military is bolstering forces in the region, deploying additional fighter aircraft and extending deployment of other warplanes, as the war rages, adding geopolitics to the risks in a week full of central bank meetings.

Economic data showed American consumers growing more cautious as trade and inflation uncertainty lingered, while investors feared the Israel-Iran fighting escalating into a broader regional conflict.

On the data front, U.S. retail sales were softer than expected in May, but consumer spending remained supported by solid wage growth.

The dollar initially softened on the print, but quickly reversed losses as the market digested the data's mixed picture, removing the strength the yen had gained following the Bank of Japan's (BOJ) rate decision earlier.

"The dollar has recently shown less traditional safe-haven behavior, in no small part due to the U.S. itself creating market uncertainty through shifting and unclear trade policies," said Uto Shinohara, senior investment strategist at Mesirow Currency Management.

"However, the dollar has found renewed support amid the escalating conflict in the Middle East, an external global risk event. This was evident on Friday when the conflict began, and again today as tensions have intensified."

Broader risk sentiment remained fragile with the Israel-Iran conflict entering its fifth day.

In Japan, the BOJ delivered little surprise to markets at the conclusion of its two-day monetary policy meeting, as it stood pat on rates and laid out a new plan to decelerate the pace of its balance sheet drawdown next year in the face of rising risks such as the Middle East conflict and U.S. tariffs.

The yen JPY=EBS swung between losses and gains after the decision, turning negative during Governor Kazuo Ueda's press conference. The dollar was last up 0.4% on the yen at 145.32 yen.

Japanese Prime Minister Shigeru Ishiba and U.S. President Donald Trump have yet to reach a trade deal.

Developments in the Middle East are keeping the mood tense, with Trump on Tuesday saying he wanted a "real end" to the nuclear dispute with Iran, and indicating he may send senior U.S. officials to meet with the Islamic Republic.

It follows news on Monday from the White House that Trump left the Group of Seven summit in Canada a day early due to the situation in the Middle East, as the president has requested that the National Security Council be prepared in the situation room.

The escalations between Israel and Iran have sent the price of Brent crude higher.

"The market is sensing that the U.S. will get involved in Iran, and that the aim is no longer nuclear facilities but regime change," said Adam Button, chief currency analyst, ForexLive. "That could mean an expensive, complicated war. The knee-jerk reaction to war is always to buy U.S. dollars, and there has been a strong move in that direction today."

Elsewhere, the euro EUR=EBS fell 0.68% to $1.1481.

The pound fell 1.08% against the dollar to $1.3430 GBP=D3. Trump signed an agreement on Monday formally lowering some tariffs on imports from Britain as the countries continue working toward a formal trade deal.

The risk-sensitive Australian dollar AUD=D3 fell 0.8% to US$0.6474. Meanwhile, against a basket of currencies, the dollar =USD rose 0.64% to 98.8.

The Fed's policy decision on Wednesday in the meantime is taking center stage for FX market watchers. Expectations are for the central bank to keep rates on hold, though the focus will be on any guidance regarding the rate outlook. 0#USDIRPR

"At the moment, there's little risk to waiting before launching another round of rate cuts, so we expect an incrementally hawkish message to emerge from tomorrow's meeting," said Karl Schamotta, chief market strategist, Corpay.

Meanwhile, investors are also looking ahead to other central bank decisions including from the Bank of England and Sweden's Riksbank later this week to guide the next move in markets.