The US dollar index is set to post the biggest monthly gain in more than a year on 30 July, a few hours before the Federal Open Market Committee concludes its debate on US interest rates.
The FOMC is widely expected to leave the interest rate at the record low and maintain the current pace of tapering of asset purchases, but the accompanying statement is expected to contain more hawkish signals this time, given the progress of the economy.
USD index, the trade-weighted index that covers greenback's performance against six major currencies, has risen to a new six-month high of 81.25 on Tuesday, where it held on Wednesday too.
The index has rallied 1.83% since end-June, the biggest monthly gain after the 1.90% rise in April 2013. If the Fed fails to satisfy the dollar bulls, then the last day of July may delete a good portion of the gains of the past four weeks.
The ADP employment data for July, due at 12:15 GMT and the Q2 gross domestic product data at 12:30 GMT are also likely to impact the greenback, though the market may prefer to wait for the Fed interpretation of the entire economic picture with rate decision scheduled at 18:00 GMT.
Safe Haven Flows
The US currency was also supported by increased safety seeking flows following the violence in the Middle East and Ukraine.
The US and European Union decided to widen the sanctions net over Russia for its involvement in the Ukraine issue, which has become a major focus on the geopolitics map after the shooting down of the Malaysian jet MH17.
Weakness of Other Currencies
Fundamental weakness of other major currencies, mainly euro, Swiss franc and the New Zealand dollar have also contributed to the dollar rally of late.
USDJPY has risen to a three-week high of 102.11 on Tuesday and is holding near there ahead of the Fed policy. EUR/USD has fallen to a new eight-month low of 1.3403 on Tuesday which is being held on Wednesday.
Against the Swiss franc, the greenback has rallied to a near six-month high of 0.9075 and against the New Zealand dollar, it has strengthened to a six-week high of 0.8494.
Weak trade numbers from Switzerland and dovish rhetoric from the Reserve Bank of New Zealand have helped the dollar perform better against the franc and the Kiwi dollar.
Despite signals of sooner rate hikes in the UK, the GBP/USD pair has fallen to a 40-day low of 1.6933 in the run up to the Fed policy, another indicator of the grip of dollar bulls in the market ahead of the big event.