Dollar Holds Near Two-Month High as Treasury Yields Climb, Fed Data Awaited

The dollar traded close to a two-month high on Tuesday, supported by a sharp rise in US Treasury yields and volatile oil prices, though further gains were held in check as investors waited for key US economic data later in the week.

The dollar index, which tracks the US currency against a basket of major peers, edged up to 101.2 and was on course for a monthly gain of 1.8% — its strongest showing since June.

The euro changed hands near a three-month low at $1.1367, after the European Central Bank's chief indicated a measured approach to tackling inflation. Sterling was steady at $1.3248, also not far from a three-month trough.

Oil prices crept higher, with Brent crude futures near $106 a barrel, as markets grew doubtful that fresh efforts to end the Iran war would succeed after US President Donald Trump rejected Tehran's ceasefire proposal.

In bond markets, a deepening selloff pushed Treasury yields to multi-year peaks. The 10-year benchmark yield reached its highest level since 2007, while the 30-year yield hit its highest since 2004. The policy-sensitive two-year yield climbed to its highest in more than two years, approaching 5%.

According to Joseph Capurso, head of foreign exchange at the Commonwealth Bank of Australia, the dollar's advance is limited for now because markets have become less sensitive to oil swings, while a global bond selloff has offset the usual lift from higher Treasury yields. He said stronger US economic data would likely reinforce the view that the US economy is outperforming, pushing US interest rates and the dollar higher relative to other economies.

Investors are looking to the PCE price index on Wednesday and nonfarm payrolls on Friday, both of which are expected to support the case for additional Federal Reserve rate increases. Market pricing now reflects a more than 70% probability of a Fed hike at the end of October, up from 57% a week earlier, according to CME Group's FedWatch tool.

The Reserve Bank of Australia is expected to raise its key rate later on Tuesday. The Australian dollar and the New Zealand dollar both slipped 0.1%, to $0.7013 and $0.5660 respectively.

The Japanese yen weakened slightly to 157.40 per dollar, surrendering much of Monday's gain, after Japan's top currency diplomat Atsushi Mimura said markets should heed the "very clear" warning Tokyo and Washington issued last week on the yen. Traders remained wary of possible intervention.

Elsewhere, the offshore yuan was little changed at 6.71 per dollar, following a three-day summit between Trump and Chinese President Xi Jinping last week that produced limited outcomes.