The U.S. dollar held near a one-month high on Tuesday as traders continued to weigh the possibility of a surprise interest-rate increase at the Federal Reserve’s upcoming meeting.

The U.S. Dollar Index edged up 0.03% to 101.55. The euro slipped to $1.1366, sterling eased to $1.3284, while the dollar rose to 163.82 yen.

Fed Rate-Hike Expectations Support the Dollar

The temporary pause in U.S. attacks on Iran pushed oil prices lower and helped ease some inflation concerns. However, U.S. Treasury yields declined only modestly, allowing the dollar to remain well supported.

According to the CME FedWatch Tool, markets are pricing in a 36.3% probability that the Fed will raise interest rates by at least 25 basis points at its meeting ending on Wednesday. That is up sharply from 16% one week earlier.

The probability of a rate hike at the Fed’s September meeting is currently estimated at around 81%.

A surprise rate increase could push the dollar to fresh highs, particularly against lower-yielding currencies such as the Japanese yen and Swiss franc.

Markets Await U.S. GDP and PCE Data

In addition to the Fed’s decision, investors will monitor U.S. second-quarter GDP data and the core PCE inflation index for further clues about the health of the world’s largest economy and the outlook for monetary policy.

A Busy Week for Central Banks

The Bank of England and the Bank of Japan are widely expected to keep interest rates unchanged at their meetings this week.

With the yen still trading near a 40-year low against the dollar, the BOJ may need to adopt a more hawkish tone to support the currency, although the timing and pace of any future rate increases are likely to remain unclear.

Other Markets

The Australian dollar fell 0.11% to $0.6981, while the New Zealand dollar declined 0.12% to $0.5766.

In cryptocurrency markets, Bitcoin dropped 1.88% to $63,694.59, while Ether fell 2.83% to $1,890.30.

Conclusion

The U.S. dollar remains supported by elevated Treasury yields and the possibility that the Federal Reserve could continue tightening monetary policy.

Its next major move will likely depend on the Fed’s decision, second-quarter GDP figures and the core PCE inflation report later this week.

Source: Reuters