By Richard Leong
NEW YORK (Reuters) - The dollar climbed on Tuesday to a three-week peak against a basket of major currencies as investors raised their outlook on a faster pace of U.S. interest rate increases following comments from Federal Reserve Chair Janet Yellen.
Yellen's remarks reinforced recent comments from other Fed policymakers who would like to see a faster pace of rate increases that is appropriate at this point of the economic expansion.
"She is laying the groundwork for three rate hikes this year," said Scott Clemons, chief investment strategist at Brown Brothers Harriman in New York.
U.S. interest rates futures <FFZ7> implied traders saw about a 41 percent chance of at least three rate increases in 2017, up from a 33 percent chance on Monday, CME Group's FedWatch program showed.
"Waiting too long to remove accommodation would be unwise," Yellen said in prepared remarks before the U.S. Senate Banking Committee, the first of her two-day testimony before Congress.
Yellen was scheduled to appear before the House of Representatives Financial Services Committee at 10 a.m. (1500 GMT) on Wednesday.
In overnight trading, the dollar index <.DXY> slipped after U.S. President Donald Trump's national security adviser Michael Flynn quit in a controversy relating to Russia.
Flynn's resignation raised worries about the Trump administration's ability to implement its economic policies, including planned tax cuts, which have been seen as bullish for the dollar and stocks.
The gauge of the greenback versus six major currencies <.DXY> pared initial losses after data showed U.S. producer prices posted the largest monthly rise in more than four years in January, supporting the view that domestic inflation is approaching the Fed's 2 percent goal.
The dollar index reached a three-week high at 101.38, reversing an earlier drop to 100.90. It was last up 0.25 percent at 101.21.
The greenback hit a two-week peak of 114.47 yen <JPY=>, erasing an earlier decline against the Japanese currency. It was last up 0.4 percent at 114.16 yen.
The euro fell 0.2 percent against the greenback <EUR=> at $1.0572 amid political risk and disappointing regional economic data.
The euro has come under pressure from concerns about France's presidential election and Greek bailout talks.
Investors have grown jittery about a possible repeat of Brexit as polls showed National Front leader Marine Le Pen, who has promised to pull France out of the euro zone and hold a referendum on European Union membership, is leading in the first round of the French presidential runoff.
(Additional reporting by Yumna Mohamed in London; Editing by Meredith Mazzilli and Bill Trott)