The dollar is rising to a new high for the year as market speculation over Wednesday's release of the US Consumer Price Index (CPI) inflation report and the Federal Reserve's Federal Open Market Committee (FOMC) policy decision increases demand.

The Bloomberg Dollar Spot Index rose for the fourth consecutive trading day on Tuesday, climbing 1.1% during this period, mainly due to last week's US non-farm payroll growth report and political turmoil in Europe. The index is currently about 0.4% below the peak reached on April 19 this year.

Patrick Locke, a foreign exchange strategist at JPMorgan Securities LLC in New York, said in an interview:"Wednesday will be a true opportunity for the dollar to continue its recent rally if Powell allows it. There are reasons to expect that the CPI and FOMC resolutions will both lean toward call option on the dollar, helping the dollar sweep three tactical wins."

Locke pointed out that Wednesday will be a rare example where "key macro inputs" appear on the same day as the FOMC releases its dot plot. He also added that the dollar tends to perform better in meetings with dot plots than in those without them, meaning Powell has one more reason to do so.

For Nathan Thooft, senior investment portfolio manager at Manulife Investment Management, the size of Fed's easing policy is more important than the time of its first rate cut. Thooft expects the dollar to remain temporarily strong near its current level.

Market economists and traders are hovering between one and two rate cuts before the end of the year, while the Fed is expected to cut interest rates three times in March. JPMorgan's Locke said:"The real test will be whether there will be two rate cuts this year or whether there will be a significant hike outside the forecast range."

"The dominance of the dollar could continue for several months," said Brent Donnelly, president of Spectra FX Solutions LLC and senior foreign exchange trader in a report. "The first round of legislative elections in France will be held on June 30, and no one will want to hold European assets before the vote. The euro and peripheral debt may continue to be under pressure as people have already been scarred by being too optimistic about the Mexican election."

The dollar dominates.

The strength of the dollar could continue for several months.

"Traders may be reacting excessively to European news after initially reacting insufficiently to Mexican news," which could hurt the euro and be bullish for the dollar," said Donnelly.

Mexican President-elect Claudia Sheinbaum said the Congress would first discuss a proposal to reform the country's judicial system, which has left investors fearing that the reform would weaken constraints on the ruling party. The peso has fallen as a result.

Donnelly said traders are likely to "overreact to European news after initially reacting insufficiently to Mexican news," which could hit the euro and be bullish for the dollar.

Mark McCormick, global head of forex and emerging markets strategy at the Toronto Dominion Bank, said on Tuesday:"In my opinion, the dollar is the biggest trading commodity in foreign exchange. There really is nowhere else to go."

JPMorgan Securities' Patrick Locke foreign exchange strategist in New York, said:"Wednesday will be a true opportunity for the dollar to continue its recent rally if Powell allows it. There are reasons to expect that the CPI and FOMC resolutions will both lean toward bullish on the dollar, helping the dollar sweep three tactical wins."