The US dollar steadied near a four-week high on Tuesday as traders weighed the odds of a Federal Reserve interest rate hike this week, even as falling oil prices offered some relief on the inflation front.

Key Fact: Markets are now pricing a nearly 40% chance of a 25-basis-point Fed rate hike on Wednesday, up from about 20% a week earlier.

Dollar Steadies After Touching Multi-Week High

The dollar index, which tracks the greenback against a basket of major currencies, was roughly flat at 101.50 after touching its highest level since July 1. The euro edged up slightly to $1.1370, while the dollar traded at 163.745 against the Japanese yen. The British pound gained modestly to $1.330.

The dollar's strength reflects a sharp repricing of Fed expectations in recent months. Treasury yields have climbed steadily since April, driven by inflation concerns tied to the US-Iran conflict and a hawkish start from new Fed Chair Kevin Warsh. Even though oil prices have pulled back after the US paused strikes on Iran over the weekend, yields remain close to their multi-month highs.

Nomura's head of G10 FX strategy, Dominic Bunning, noted that recent moves in US Treasury yields have done much of the work explaining the dollar's direction, while also flagging a risk that markets may be overestimating the odds of a near-term hike — meaning any dovish surprise could trigger unwinding of long-dollar positions.

Key Stat: Net long dollar positions reached their highest level since 2015 in the latest week, according to regulatory data.

Fed Decision and Economic Data Ahead

The Federal Reserve wraps up its two-day policy meeting on Wednesday, and a growing number of major brokerages now warn that policymakers could raise rates given this month's jump in oil prices. Traders currently see almost a 95% probability of a hike by September, even if this week's meeting doesn't deliver one. Investors will also be watching US second-quarter GDP data and the Fed's preferred inflation gauge, core PCE, later this week for further clues.

Other Currencies and a Packed Central Bank Week

Elsewhere, the Australian dollar weakened 0.3% against the greenback to $0.697, after Reserve Bank of Australia Governor Michele Bullock said underlying inflation remains too high and further softening in domestic demand may be needed to bring it down. New Zealand's currency traded at $0.5772.

The Bank of England and Bank of Japan are both widely expected to hold rates steady at their meetings later this week, while maintaining cautious language around inflation risks. The yen remains a key focus after sliding to fresh 40-year lows near 164 per dollar last week, keeping traders on alert for possible intervention from Japanese authorities. Japan's Finance Minister reiterated that Tokyo's approach to responding to currency moves as needed remains unchanged.

Crypto Markets Also Feel the Pressure

The broader risk-off tone extended into crypto markets as well. Bitcoin fell 2.3% to $63,414.16, while Ether dropped 3.4% to $1,879.71 — its sharpest daily percentage decline in a month.

Why It Matters

This week's Fed decision, combined with GDP and inflation data, could set the tone for currency and risk-asset markets well into the third quarter. With near-record long-dollar positioning already in place, any dovish surprise from the Fed carries the potential to trigger an outsized market reaction across currencies, bonds, and crypto alike.

This article is for informational purposes only and does not constitute financial advice. Do your own research.