The Dollar held near a 20-year high against major rivals on Tuesday as investors prepared for another aggressive Fed rate hike in a bid to curb red-hot inflation.

The Dollar index – measuring the currency against six peers – rose 0.09% on Tuesday to 109.64, holding steady after retreating from a high of 110.9 in early September, a level not seen since 2002.

Investors have priced in an additional 75 basis point rate increase on Wednesday by the Federal Open Market Committee (FOMC), with a 19% chance for a full percentage point rise.

In addition, the greenback 0.07% to 143.29 Yen, prolonging a week-long consolidation, Reuters reports, after reaching 144.00 earlier this month for the first time in 24 years. 

Japan’s central bank is making a policy decision on Thursday, and it’s widely predicted to maintain ultra-easy stimulus settings in order to bolster the shaky economic recovery.

This is despite core consumer inflation data accelerating to an eight-year top of 2.8% last month, surpassing the Bank of Japan's target of 2% for the fifth consecutive month.

"CPI was very strong, but the BOJ will likely keep policy unchanged, so expectations about Fed policy are more important" for currency markets, said JP Morgan strategist, Tohru Sasaki.

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

Elsewhere, there was barely any change for the Euro on Tuesday at $1.00235, after gradually edging upwards over the last week and reinforcing its position above parity. It fell to a low of $0.9864 on 6th September for the first time in 20 years.

The Pound declined on Tuesday to $1.14245, following the 37-year low hit at the end of last week of $1.13510.

The Bank of England is holding a policy meeting on Thursday, with investors undecided whether an increase of 50 or 75 basis points is looming.

"With expectations split, the prospect of GBP volatility is unsurprisingly elevated," Chris Weston, head of markets research at Pepperstone stated.

"Given the heavy trend lower in the GBP, one can easily assume that the speculative part of the market is already heavily short GBP. This should cushion the downside on a 50bp hike but see a pronounced move higher should we see a 75bp hike."