The euro surged to a four-year high on Tuesday as the dollar faced selling pressure ahead of the Federal Reserve's policy announcement on Wednesday, with markets anticipating a 25 basis point rate cut.

The Bloomberg Dollar Index dropped as much as 0.6% to its lowest level since July 1st.

U.S. retail sales rose 0.6% month-over-month, beating expectations of 0.2% growth. While the dollar initially gained support from this data, it subsequently resumed its decline.

The Bloomberg Dollar Index's one-month implied volatility rebounded from approximately one-year lows to around 7.1%.

Short-term U.S. Treasuries led gains, with the 2-year yield falling 3 basis points to 3.51%.

"If Powell and other officials fail to validate the market's extremely dovish expectations, market participants will face the risk of 'buy the rumor, sell the fact' volatility in FX markets," said Valentin Marinov, head of G-10 FX research and strategy at Amundi.

EUR/USD climbed nearly 1% to an intraday high of 1.1878, marking the highest intraday level since September 2021.

The one-week risk reversal rose to 66 basis points, representing the most bullish level since July 1st.

"As 2-year Treasury yields declined, the dollar fell broadly, pushing EUR/USD to new cycle highs," said Brown Brothers Harriman strategist Elias Haddad. "Even the strong August U.S. retail sales growth is unlikely to prevent the Fed from implementing a dovish rate cut tomorrow."

The Canadian dollar gained 0.3%, with USD/CAD trading at 1.3743.

The loonie was heading for a second consecutive day of gains, marking its first back-to-back advance this month ahead of the Bank of Canada's decision announcement.

Canada's core inflation rate declined, reinforcing the case for a rate cut by the central bank on Wednesday.

USD/JPY fell 0.7% to 146.35, posting its largest intraday decline in a week.

The currency pair previously touched 146.28, its lowest level since August 14th.

GBP/USD rose 0.5% to 1.3672, reaching its highest level since July 4th, while USD/CHF dropped 1.1% to 0.7859, hitting a new low since January 2015.

Data indicated that the UK labor market appears to have weathered the worst of the downturn triggered by tax increases.

The one-week risk reversal for GBP/USD has now turned positive, representing a significant reversal from earlier this month.