[Source: Reuters]

The dollar hit a three-month month high against a basket of currencies on Tuesday.

After Federal Reserve Chair Jerome Powell said the U.S. central bank is likely to raise rates more than previously expected and warned that the process of getting inflation back to 2% has “a long way to go.”

The Fed is also prepared to move in larger steps if the “totality” of incoming information suggests tougher measures are needed to control price increases, Powell told U.S. lawmakers on Tuesday.

The Fed had slowed the pace of its tightening to 25 basis points at its last two meetings, following larger hikes last year.

“Powell is explicitly talking about a higher target for interest rates. This is something that the market has been talking about but obviously hasn’t been fully priced in,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina.

Fed funds futures traders are now pricing in a roughly 60% probability that the Fed will hike rates by 50 basis points at its March 21-22 meeting. The probability had been seen at around 22% earlier on Tuesday.

Investors will be closely watching the Fed’s updated “dot plot” of rate expectations at March’s meeting for further indications of how high Fed officials expect to raise rates.

“The market is zeroed in on the March 22 ‘dot plot’ for a clear signal” of what the terminal rate is likely to be, said Adam Button, chief currency analyst at ForexLive in Toronto.

Fed officials in December had forecast that rates would increase to between 5.00% and 5.25% this year. Traders are now pricing for the rate to peak at 5.64% in September.

Friday’s employment report for February will also give clues on whether January’s blockbuster report, which showed employers added a much more-than-expected 517,000 jobs, was a one-off spike or part of a more sustained trend.

Economists are projecting job gains of 203,000, while wages are expected to rise 0.3% for the month and 4.8% on an annual basis. (USNFAR=ECI), (USAVGE=ECI), (USAVHE=ECI)

The dollar index rose as high as 105.65, up 1.3% on the day and the highest since Dec. 6. The euro dropped 1.28% to $1.0548.

The greenback reached 137.17 Japanese yen , up around 0.9% on the day and the highest since Dec. 20.

Sterling slipped 1.68% to $1.1824, after hitting $1.1822, the lowest since Nov. 21.

The Aussie dollar dropped 2.24% to $0.6582, the lowest since Nov. 11.

The Australian currency had slid after the Reserve Bank of Australia (RBA) raised its cash rate by 25 basis points to the highest in more than a decade, as expected, but suggested it might be nearly done tightening.