USD fell against most of its major rivals in the European session on Tuesday as fears over accelerating inflation and a potential policy tightening by the Federal Reserve in response to it eased, as the Fed’s policymakers continued to repeat their views that any surge in inflation would be temporary.

The U.S. Dollar Index (DXY), measuring the U.S. currency's value relative to a basket of foreign currencies, dropped 0.25% to 89.62.

Fed's governor Lael Brainard stated on Monday that she expects price pressures from bottlenecks and supply shortages in the coming months, but much of those price gains should subside over time. However, she noted that the Fed has "the tools and the experience to gently guide inflation back to target" if price pressures move "persistently and materially above our goals".

St. Louis President James Bullard said later on Monday that he expects price pressures from the economic rebound to be temporary. He also noted that it isn't the time for the Fed to change its monetary policy. “I think there will come a time when we can talk more about changing the parameters of monetary policy, I don’t think we should do it when we’re still in the pandemic,” he said.

Investors are now awaiting the release of the core personal consumption expenditures price index (PCE), the Fed’s preferred inflation measure, due on Thursday, which could impact the expectations for the monetary policy.