Illustration shows U.S. Dollar and Euro banknotes
U.S. Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. Reuters

The dollar remained firm below a two-decade high versus major peers on Tuesday, as investors braced for the Federal Reserve to continue its aggressive interest-rate-hiking campaign to rein in overheated inflation.

The dollar index, which measures the greenback against six counterparts, was little changed at 109.53, stable for the moment after pulling back from as high as 110.79 earlier this month, a level not seen since June 2002.

The two-year U.S. Treasury yield, which is extremely sensitive to policy expectations, rose as high as 3.970% overnight for the first time since November 2007. The 10-year yield reached a high of 3.518%, a level not seen since April 2011.

Investors have fully priced another 75 basis point bump by the Federal Open Market Committee for Wednesday, and lay 19% odds for a super-sized full percentage point increase.

While still elevated, those bets have come down from around 38% on Wednesday, when they were shocked higher by a surprise acceleration in U.S. consumer prices for August.

The dollar eased 0.15% to 142.96 yen, continuing a week-long consolidation following two attempts at 145 this month that took it as high as 144.99 on Sept. 7 for the first time in 24 years. The dollar-yen currency pair tends to track the long-term yield spread between U.S. and Japanese government bonds.

The Bank of Japan decides policy on Thursday, and is widely expected to keep its ultra-easy stimulus settings unchanged. They include pinning the 10-year yield near zero.

"We have to see the FOMC," said Tohru Sasaki, a strategist at J.P. Morgan in Tokyo.

"Dollar-yen will eventually break above 145, but the speed depends on how hawkish the Fed is, and developments in interest rate differentials."

The euro was little changed at $1.0030, after grinding slowly higher over the past week and strengthening its position above parity. It dropped as low as $0.9864 on Sept. 6 for the first time in two decades.

Sterling was flat at $1.14295, finding its feet after a drop to a 37-year low of $1.13510 at the end of last week.

The Bank of England will decide policy on Thursday. Investors are split over whether a 50 or 75 basis point hike is on the way.

The risk-sensitive Australian dollar slipped 0.07% to $0.6722 and the New Zealand dollar fell 0.23% to $0.59435.

Bitcoin eased 0.48% to $19,445, after swinging between a two-month low of $18,540 and a 3 1/2-week high of $22,781 over the past two weeks.