By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) - The dollar rose on Tuesday, bolstered by an expected interest rate increase by the U.S. Federal Reserve this week and helped by political risks in Europe amid Dutch and French elections that have pressured European currencies.
"Sentiment remains firmly bullish towards the greenback with further gains expected as speculators bet on the Federal Reserve raising U.S. interest rates repeatedly this year," said Britain-based research analyst Lukman Otunuga at online currency broker FXTM.
The Fed starts a two-day monetary policy meeting on Tuesday. Fed funds futures have priced in a 95 percent chance the Fed will nudge rates higher on Wednesday.
The dollar index, which measures the greenback against a basket of six major currencies, climbed 0.2 percent to 101.54 <.DXY>.
Also buoying the dollar's outlook, 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.
In particular, a key gauge of underlying producer price pressures that excludes food, energy and trade services increased 0.3 percent in February, the biggest gain since April 2016. The so-called core PPI rose 0.2 percent in January. [L2N1GR0ER]
The euro, which hit a five-week high on Monday above $1.07 <EUR=> on expectations the European Central Bank is moving towards winding back its stimulus program, fell 0.2 percent to $1.0636 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 Geert Wilders surges. Though Wilders has little chance of winning enough seats to form a government, a PVV win would send shock waves across Europe.
Sterling, meanwhile, slipped 0.5 percent to $1.2151 <GBP=D3>, after earlier falling to an eight-week low, on 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/]
Investors also have their eyes on the Trump administration's fiscal 2018 federal budget plan, which will be released on Thursday, and a meeting of G20 finance ministers and central bankers in Germany on Friday.
(Additional reporting by Jemima Kelly in London; Editing by Bernadette Baum)