The dollar extended gains against the euro on Tuesday after expectations that the Federal Reserve could raise U.S. interest rates sooner than previously expected, but fell against the yen on safe-haven demand for the Japanese currency.
Traders said that strong U.S. economic data, including the government's nonfarm payrolls report last Friday showing employment returned to pre-recession levels, supported the view that the Fed could take a more hawkish stance on tightening monetary policy at its meeting next week.
Traders' bracing for potential signs of a Fed rate hike earlier than forecast helped push U.S. government bond yields higher, which in turn drew demand for dollars. Expectations for strong U.S. retail sales data on Thursday, in a week of scarce economic data, bolstered views of a Fed rate hike earlier than previously anticipated, traders said. Traders currently expect the Fed to hike rates in the second half of 2015, based on U.S. short-term interest rate futures.