| NEW YORK
NEW YORK The dollar rose on Tuesday, bolstered by a widely expected U.S. interest rate increase from the Federal Reserve this week and bolstered by political risks in Europe as Dutch elections get under way.
The Fed started its two-day monetary policy meeting on Tuesday, with the futures market pricing in a 95 percent chance of a U.S. interest rate increase on Wednesday.
"Any hint that further policy normalization over the coming months is likely should keep the dollar biased higher," said Omer Esiner, chief market analyst, at Commonwealth Foreign Exchange in Washington.
"Additional hikes in June and September would open up the calendar for a possible fourth interest rate hike this year at the Fed's final meeting of 2017 in December," he added.
The dollar index, which measures the greenback against a basket of six major currencies, climbed 0.4 percent to 101.71.
The market is now focused on the Fed's so-called dot plots or interest rate forecasts.
James Chen, head of research at Forex.com in Bedminster, New Jersey, noted that should the U.S. central bank signal a fourth rate increase in 2017, from an earlier forecast of just three hikes, this would further propel the dollar.
A higher-than-expected rise in a U.S. inflation gauge added to the dollar's positive tone and further reinforced already firm expectations of a Fed rate hike on Wednesday.
Data showed that U.S. producer prices rose more than expected in February and the year-on-year gain was the largest in nearly five years.
The euro, which hit a five-week high on Monday above $1.07 on expectations the European Central Bank could wind down its stimulus programme, fell 0.4 percent to $1.0609 on caution ahead of the Dutch vote.
That extended falls from the previous day on comments by ECB officials that were seen as relatively dovish.
The Netherlands will vote on Wednesday in an election that is seen as a fresh test of the anti-immigrant, populist politics that swept across the West in 2016.
Polls suggest the government may lose about half its seats while the anti-Islam Party for Freedom (PVV) party of right-wing nationalist Geert Wilders surges. Though Wilders has little chance of winning enough seats to form a government, a PVV win would send fresh shock waves across Europe.
Sterling, meanwhile, slipped 0.5 percent to $1.2158, after earlier falling to an eight-week low, amid worries about a possible second Scottish independence referendum and the triggering of Article 50, which will formally begin the negotiations that will take Britain out of the EU. [GBP/]
(Additional reporting by Jemima Kelly in London, editing by G Crosse)