The US dollar held gains across all G10 currencies, fueled by a surge in 10-year Treasury yields to their highest level in nearly two decades, with the Federal Reserve's rate decision looming on Wednesday. The Bloomberg Dollar Spot Index advanced 0.2% to 1197.32, after touching a near two-week high earlier in the session, while the 10-year Treasury yield climbed to levels not seen since 2007. Bond traders are pricing in a rate hike by the Fed on Wednesday, with conviction levels that have rarely been this strong in decades.

The dollar strengthened 0.5% against the yen to 155.13, as the Japanese currency extended its decline to a more than one-week low, underperforming its major peers. This came following reports that Japan is considering boosting its defense spending. Meanwhile, the euro slipped 0.1% to 1.1541 against the dollar, as traders and European central bank officials increasingly diverge on the outlook for future rate hikes. The pound also fell 0.2% to 1.3479, after data showed UK employers cut staff at the fastest pace in nine months, underscoring weakness in the labor market. The Bank of England is set to announce its latest rate decision on Thursday, while the Canadian dollar eased 0.1% to 1.3915 against the US dollar.