Investing.com - The dollar traded largely higher against most major currencies on Tuesday after markets bet the Federal Reserve will raise interest rates likely sooner next year than once anticipated.
In U.S. trading on Tuesday, EUR/USD was up 0.20% at 1.2920, rebounding after touching 14-month lows.
The euro weakened to 14-month lows earlier due to growing expectations that monetary policies in the U.S. and Europe will diverge, sentiments fueled by hawkish language in a Federal Reserve Bank of San Francisco report on Monday, which hinted that markets may be underestimating the pace at which rates may rise, evidenced by low volatility.
"Recently, subdued levels of volatility in financial markets have received some attention. For example, Federal Reserve Chair Janet Yellen (2014) noted that 'indicators of expected volatility in some asset markets have fallen to low levels, suggesting that some investors may underappreciate the potential for losses and volatility going forward,''" the report read.
"Prices of financial assets, such as stocks and bonds, are sensitive to unexpected changes in interest rates because their present values are determined by discounting future cash flows. Thus, the low volatility in asset markets could, in part, reflect market participants’ relative certainty about the future course of interest rates."
The euro, meanwhile, came under recent pressure due to a recent European Central Bank decision to trim its benchmark interest rate to a record-low 0.05% from 0.15%.
The central bank also lowered its deposit facility rate to -0.20% from -0.10% previously and its marginal lending rate to 0.30% from 0.40% and added it will begin an asset-backed securities purchasing program to shore up the recovery.
By Tuesday, investors felt the single currency had dipped too far and snapped up nicely priced positions, though the dollar held steady against most other currencies.
The dollar was up against the yen, with USD/JPY up 0.30% at 106.34, and down against the Swiss franc, with USD/CHF down 0.17% at 0.9340.
The greenback was up against the pound, with GBP/USD down 0.08% at 1.6092.
The pound came under heavy selling pressure on Monday after a weekend YouGov/Sunday Times found that 51% in Scotland favored voting for independence from the U.K. in a referendum set to take place on Sept. 18.
Uncertainty as to what currency a newly independent Scotland would adopt, how much U.K. debt it would assume and what steps London would take to keep its northern neighbor in the fold sent investors avoiding sterling on Monday and into Tuesday.
Elsewhere, largely positive U.K. data gave the pound some support by bringing in the bottom fishers.
Official data showed that U.K. manufacturing production rose 0.3% in July, in line with expectations, after a 0.3% gain the previous month.
A separate report showed that the U.K. trade deficit widened to £10.19 billion in July, from £9.41 billion in June. Analysts had expected the trade deficit to narrow to £9.10 billion in July, though expectations remained firm that the economy continues to recover.
The dollar was up against its cousins in Canada, Australia and New Zealand, with USD/CAD up 0.26% at 1.1003, AUD/USD down 0.92% at 0.9197 and NZD/USD down 0.58% at 0.8226.
The US Dollar Index, which tracks the performance of the greenback versus a basket of six other major currencies, was down 0.01% at 84.43.