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The dollar hung near a seven-month low on Tuesday on wagers the U.S. central bank will start cutting interest rates from next month, with traders preparing for comments from Federal Reserve Chair Jerome Powell on Friday.

The weakness in the dollar lifted the euro to its highest this year, while sterling was perched near a one-month peak. The emerging markets currency index was also at a record high.

The Japanese yen was a shade stronger at 146.50 per dollar, hovering close to the near two-week high it touched in the previous session but still further away from the seven-month high of 141.675 it touched at the start of August.

The focus this week will be on Powell's speech in Jackson Hole, likely keeping investors hesitant in placing major bets before the event.

Investors largely expect Powell to acknowledge the case for a rate cut and will parse his words for cues on whether the Fed will start with a 25 basis point cut or a 50 bps cut in September.

Joseph Capurso, head of international economics at the Commonwealth Bank of Australia, expects Powell to retain optionality for delayed cuts or larger cuts subject to the next U.S. data releases on inflation and payrolls.

"In our view, the economic circumstances require a standard 25 bp rather than an outsized cut to the Funds rate," Capurso said, adding the dollar is likely to keep falling this week on the prospect of rate cuts.

The euro last fetched $1.1080 on Tuesday having touched $1.108775, its highest since Dec. 28 in early trading. The single currency is up 2.4% this month, on course for its strongest monthly performance since November.

The pound was steady at $1.2985 in early trading after touching a one-month high of $1.2998 in the previous session.

The dollar index, which measures the U.S. currency against six rivals, touched its lowest since Jan. 2 of 101.82 on Tuesday. The index is down more than 2% in August and set for second month in the red.

Markets are pricing in a 24.5% chance of a 50 bps cut in September, down from 50% a week ago, with a 25-basis-point reduction having odds of 75.5%, the CME FedWatch Tool showed. Traders are pricing in 93 bps of cuts this year.

"The encouraging US macro backdrop of solid domestic demand activity and moderate disinflation suggests the Fed is unlikely to cut the funds rate as much as is currently priced-in", said Elias Haddad, senior markets strategist at Brown Brothers Harriman.

"As such, there is room for an upward reassessment in Fed funds rate expectations in favour of USD and Treasury yields."

A slim majority of economists polled by Reuters expect the U.S. central bank to cut rates by 25 bps at each of the remaining three meetings of 2024.

Investor attention will also be on the minutes of the Fed's last meeting, due to be released on Wednesday.

The Australian dollar was 0.12% lower at $0.6725, while the New Zealand dollar was little changed at $0.61135.