The dollar strengthened to a one-week high against a basket of major currencies on Tuesday, supported by a rise in Treasury yields following a report US President Donald Trump was edging towards choosing a hawk as the next head of the Federal Reserve.

US 2-year Treasury yields hit their highest in almost nine years late on Monday, after a report that Trump was favouring Stanford economist John Taylor to head the Fed. They stayed close to those levels on Tuesday.

Next Fed chief

Taylor, an advocate of a rules-based approach to monetary policy, is seen as more hawkish than current Chair Janet Yellen and would therefore make a faster pace of tightening likely, boosting the dollar.

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 and 5 per cent should Taylor be chosen.

“A potential shift in strategy towards a more rules-based approach for setting policy would be seen as less supportive for financial markets and increase the likelihood of the Fed raising rates materially more in the coming years than is currently priced in,” he said.

The dollar index - which measures the greenback against a basket of six major peers - rose on the report, and on Tuesday climbed as much as a quarter of a per cent to 93.527, its strongest since October 10.

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 to meet Yellen

Trump will meet current Yellen on Thursday as part of his search for a new candidate for her position, a source familiar with plans for the meeting said.

Knocked by a stronger dollar, the euro slipped 0.3 per cent to a one-week lwo of $1.1755, having fallen almost 3 per cent since hitting a 2-1/2-year high last month.

“The European Central Bank is now considered less hawkish than the market had initially thought last month, pushing German bund yields lower and in turn favouring the dollar against the euro,” said Junichi Ishikawa, senior forex strategist at IG Securities in Tokyo.

The greenback was flat at 112.16 yen after rising 0.3 percent late on Monday, when it pulled away from a three-week low of 111.650. The Australian dollar was 0.1 per cent lower at $0.7858 as its rally last week to a two-week high on upbeat Chinese data lost momentum.

Sterling was steady at $1.3261, with traders awaiting UK inflation data as well as testimony from Bank of England Governor Mark Carney for potential cues.

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