Investing.com - The dollar rose to the highs of the year against a currency basket on Tuesday as investors awaited a Federal Reserve policy meeting that is expected to point to another two or possibly even three rate hikes this year.
The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, was up 0.67% to 92.24 by 10:21 AM ET (14:21 GMT), the highest level since January 11.
The index rose 2% in April after the yield on 10-year U.S. Treasury notes rose above the psychologically important 3% level for the first time in four years.
Rising inflation would be a catalyst to push the Fed toward raising interest rates at a faster pace than currently expected. Fed officials projected three increases in 2018 at their meetings December and March.
The Fed is due to conclude its two-day meeting on Wednesday and is not expected to take any action on interest rates. The majority of economists believe the next move higher will come its meeting in June.
Markets are also looking ahead to Friday’s U.S. employment report for April, which could provide further signs of strength in the world's largest economy.
The dollar shrugged off data showing that U.S. manufacturing activity slowed slightly, but remained solid in April.
The euro fell to its lowest levels since January against the dollar, with EUR/USD down 0.61% to 1.1997.
The single currency was pressured lower after data on Monday showing that retail sales in Germany, the euro area’s largest economy, declined for a fourth consecutive month in March.
It was the latest indication that growth in the euro zone has moderated since the start of the year, dampening expectations that the European Central Bank will soon start scaling back its stimulus program.
The dollar rose to fresh two-and-a-half month high against the yen, with USD/JPY up 0.33% to 109.67.
Sterling was also sharply lower against the dollar, with GBP/USD down 1% to 1.3624 after data showing that activity in the UK manufacturing sector grew at the slowest pace in seventeen months in April.
The report saw investors slash expectations for a rate hike from the Bank of England at its upcoming meeting next week after overall economic growth slowed to near stagnation in the first quarter.