Dollar hits near two-week high in Europe

The dollar touched an almost two-week high against a basket of major currencies on Tuesday after comments from Federal Reserve officials revived expectations that US interest rates will still be hiked later this year.
The greenback has bounced back over 2 percent since lows hit on Friday in the wake of the Fed's decision not to raise rates immediately and its paring back of US growth forecasts. Though some now do not expect a rate hike until early next year, about half are betting on a rise in October or December.
In stark contrast, expectations are growing that the European Central Bank and Bank of Japan could expand their already expansive stimulus programmes, which is putting pressure on the euro and yen, while boosting the greenback further.
The single currency dropped 0.3 percent on Tuesday to $1.1159, its weakest since September 9, as euro zone bond yields also fell. But the dollar was down 0.6 percent against the safe-haven yen at 119.85 yen as shares slid.
"The main focus is equities, and FX is responding to that, so the yen is bid, which is partly a reflection of lower risk appetite," said Citi currency strategist Josh O'Byrne.
"The euro is down - I would say most of all that's a reflection of a rally in fixed income...which suggests the market sees this volatility in financial markets and stocks as increasing the potential for ECB easing."
Against a basket of six major currencies, the dollar rose 0.1 percent to 96.088, its strongest level since September 10.
"As long as the markets continue to calm down, particularly emerging markets, there is definitely a reason to trade the dollar slightly higher, but not too much," said Commerzbank FX strategist Esther Reichelt in Frankfurt.
"Too much dollar strength could worsen the inflation outlook and could lead to the Fed not hiking."
Atlanta Fed President Dennis Lockhart on Monday said last week's decision to leave rates unchanged was largely a "risk management" exercise to be sure recent market volatility would not become a drag on the US economy. He said he still expects the Fed to hike rates later this year.
Investors are now waiting to hear from Fed Chair Janet Yellen herself, who is due to speak on Thursday.
Japanese markets remained shut for a public holiday and will also be closed on Wednesday. Trade will resume on Thursday.