JOHANNESBURG, April 29 (Reuters) - The South African rand fell sharply on Wednesday as investors waited for the U.S. Federal Reserve's interest rate decision later in the day, against a backdrop of an Iran war that shows little sign of imminent resolution.
o At 1405 GMT the rand traded at 16.7350 against the dollar, down 1.3% from its previous close.
o The U.S. dollar strengthened against the basket of currencies as the Federal Reserve was expected to hold interest rates steady, amid growing concerns that elevated energy costs could morph from a one-off shock into broader underlying inflation.
o Diplomatic efforts to end the Iran conflict have stalled, with U.S. President Donald Trump rejecting Tehran's latest proposal and saying Iran had told Washington it was in a "state of collapse" while working out its leadership.
o The nearly two-month war in the Middle East has led to soaring fuel prices, eroding consumer confidence to a record low and wiping out market pricing for rate cuts.
o Nedbank economists said in a research note that markets broadly expect policy rates to be held steady, reflecting a continued "wait-and-see" approach amid elevated geopolitical uncertainty and mixed inflation dynamics.
o "The Fed is expected to keep the Fed funds target rate unchanged at 3.75%, as disinflation progress remains uneven and activity data continues to surprise modestly to the upside," the bank's economists said.
o On the Johannesburg Stock Exchange, the Top-40 index was down 0.7%.
o South Africa's benchmark 2035 government bond was weaker, as the yield rose 8.5 basis points to 8.845%.
(Reporting by Anathi Madubela, Sfundo Parakozov and Nilutpal Timsina; Editing by Andrew Heavens and Tomasz Janowski)
