The U.S. dollar held at a one-month high on Tuesday as traders weighed a slim but lingering chance of a rate hike at the Federal Reserve's upcoming meeting, even as falling oil prices eased some concerns over inflation.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, edged up 0.03% to 101.55, with the euro down 0.01% at $1.1366. Against the Japanese yen, the dollar gained 0.05% to 163.82, while sterling eased 0.02% to $1.3284.
Although a pause in U.S. attacks on Iran pushed oil prices lower and somewhat eased inflation worries, U.S. Treasury yields retreated only modestly compared with moves in other markets overnight.
"The lack of meaningful buying at the front end of the Treasury curve has helped keep the U.S. dollar well supported," said Chris Weston, head of research at Pepperstone.
The Fed will hold a two-day policy meeting ending on Wednesday. A growing number of major brokerages believe there is a real risk of the Fed delivering a rate hike this week, given the surge in oil prices during the month and the escalation in tensions in the Middle East.
Expectations for a rate hike of at least 25 basis points from the Fed at its policy announcement are pegged at 36.3%, according to CME FedWatch, up from 16% a week ago. Markets are pricing in an 81% chance for a hike at the central bank's September meeting.
"If we do get a surprise hike, surely that's going to lend support to the dollar, probably going to see new highs and probably sustain the level of strength on the dollar especially against the lower yielders, which are Japanese yen and Swiss franc," said Mahjabeen Zaman, head of FX research at ANZ Bank, in a podcast.
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