The dollar rose to a one-week high against a basket of currencies on Tuesday on speculation that U.S. President Donald Trump was leaning towards nominating a Federal Reserve head who would be more inclined to raise interest rates at a faster pace.
The greenback was also supported by U.S. two-year Treasury yields hitting nine-year highs on Tuesday. Yields climbed as well on growing expectations that Trump favored Stanford economist John Taylor to head the U.S. central bank.
"Taylor is perceived as more hawkish than Ms.(Janet) Yellen so under his potential tutelage, the central bank might lift borrowing rates more aggressively, which would bolster the dollar's allure," said Joe Manimbo, senior marker analyst, at Western Union Business Solutions in Washington.
The dollar index, which measures the greenback against a basket of six major peers, hit a one-week high of 93.729. The index was last up 0.2 percent at 93.50.
Interest rates futures implied traders saw a 93 percent chance the Fed would raise rates in December, CME Group's FedWatch program showed. MUFG currency economist Lee Hardman, in London, said the bank would "not be surprised" to see an initial jump in the dollar of between 3 percent and 5 percent should Taylor be chosen.
Bloomberg reported on Monday that Trump was impressed with Taylor after meeting with him last week. Trump's shortlist also includes Jerome Powell, a Fed governor; Trump's top economic adviser Gary Cohn; Yellen, whose term expires in February; and Kevin Warsh, a former Fed governor, sources have said, though investors say the chances of Warsh being selected have fallen.
Trump is expected to announce his pick before going to Asia in early November.
Knocked by a stronger dollar, the euro slipped to a one-week low of $1.1734, having fallen almost 3 percent since hitting a 2-½-year high last month. The euro was last down 0.2 percent at $1.1770.
The euro did not budge on German ZEW economic sentiment data that fell short of forecast by coming at 17.6 points, below an expected 20.1 points. Markets are wary of chasing the euro lower before a European Central Bank policy meeting next week.
Sterling dropped below $1.32 for the first time since Thursday, after comments by Bank of England policymakers were interpreted by markets as broadly dovish. Earlier on Tuesday, official data showed Britain's inflation rate hit 3 percent, above the BoE's 2 percent target but in line with expectations.