By Karen Brettell

NEW YORK (Reuters) – The U.S. dollar fell against a basket of currencies on Tuesday, as investors evaluated how much of the Federal Reserve’s expected move to hike rates this week and beyond was already priced in.

The dollar index hit a 20-year high last week on expectations the U.S. central bank will be more aggressive than peers in tightening policy, with inflation running at its fastest pace in 40 years.

But investors are also questioning whether most of the Fed’s hawkishness is already factored in and the dollar’s bull run may be due for a pause.

“I think that so much good news for the U.S. is priced in that there could be a buy the rumor sell the fact,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

The Fed is expected to raise interest rates by 50 basis points and announce plans to reduce its $9 trillion balance sheet when it concludes its two-day meeting on Wednesday.

Fed funds futures traders expect the Fed’s benchmark rate to rise to 2.81% by year-end, from 0.33% now.

Comments by Fed Chairman Jerome Powell at the conclusion of the meeting will be scrutinized for any new indications about whether the central bank will continue to hike rates to battle rising price pressures even if the economy weakens.

The dollar index was last at 103.17, down 0.37% on the day, after reaching 103.93 on Thursday, the highest since Dec. 2002.

The Aussie dollar was the best performer on the day after the Reserve Bank of Australia raised its cash rate by a surprisingly large 25 basis points to 0.35%, the first hike in over a decade, and flagged more to come as it pulls down the curtain on massive pandemic stimulus.

The Aussie was last up 0.79% at $0.7108.

The euro rose to $1.0556, up 0.47%, after dropping to $1.0470 on Thursday, the lowest since Jan. 2017.

Concerns about inflation, growth and energy insecurity as a result of sanctions imposed on Russia after its invasion of Ukraine have sent the euro 14% lower against the dollar in the past three months.

Italian Prime Minister Mario Draghi on Tuesday called on the European Union to act on surging energy costs, saying “structural solutions” were needed.

“The European Union’s energy security issues remain precarious suggesting that the euro is certainly not out of the woods yet,” said Jane Foley, head of FX strategy, at Rabobank in London.

The U.S. dollar has also benefited from safe-haven flows as COVID-19 restrictions in China trigger concerns about global growth and new supply chain disruptions.

Some of Shanghai’s 25 million people managed to get out on Tuesday for short walks and shopping after enduring more than a month under a COVID-19 lockdown, while China’s capital, Beijing, focused on mass tests and said it would keep schools closed.

The Japanese yen held just above 20-year lows against the dollar reached on Thursday, when the Bank of Japan strengthened its commitment to keep interest rates ultra-low by vowing to buy unlimited amounts of bonds daily to defend its yield target.

The Japanese currency was last at 129.87, after reaching 131.24 on Thursday, the weakest since April 2002.

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Currency bid prices at 9:39AM (1339 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 103.1700 103.5700 -0.37% 7.847% +103.6800 +103.0200

Euro/Dollar $1.0556 $1.0509 +0.47% -7.13% +$1.0578 +$1.0493

Dollar/Yen 129.8700 130.1700 -0.22% +12.82% +130.2850 +129.7000

Euro/Yen 137.12 136.78 +0.25% +5.22% +137.3700 +136.5500

Dollar/Swiss 0.9747 0.9776 -0.29% +6.86% +0.9794 +0.9722

Sterling/Dollar $1.2540 $1.2495 +0.36% -7.27% +$1.2567 +$1.2493

Dollar/Canadian 1.2853 1.2879 -0.21% +1.65% +1.2893 +1.2840

Aussie/Dollar $0.7108 $0.7052 +0.79% -2.21% +$0.7147 +$0.7048

Euro/Swiss 1.0287 1.0269 +0.18% -0.79% +1.0295 +1.0256

Euro/Sterling 0.8417 0.8405 +0.14% +0.20% +0.8420 +0.8373

NZ $0.6444 $0.6430 +0.30% -5.78% +$0.6475 +$0.6413

Dollar/Dollar

Dollar/Norway 9.3915 9.4445 -0.50% +6.67% +9.4645 +9.3840

Euro/Norway 9.9175 9.9238 -0.06% -0.95% +9.9435 +9.8827

Dollar/Sweden 9.8469 9.9125 -0.11% +9.19% +9.9194 +9.8304

Euro/Sweden 10.3953 10.4072 -0.11% +1.58% +10.4195 +10.3702

(Additional reporting by Joice Alves in London; Editing by Edmund Blair)