Dollar near two-week high as oil surge lifts yields, Fed hike bets

The dollar index climbed to a two-week high on Tuesday, buoyed by surging oil prices and expectations of a Federal Reserve interest rate hike later in the week. The euro and British pound lagged, while the yen dropped near a seven-month low before the Bank of Japan's anticipated rate hike on Friday. Oil prices reached US$107 a barrel, near a four-month peak, after Yemen's Iran-aligned Houthis attacked Saudi Arabia and Gulf-Iran talks were postponed.

This spike in oil prices added to inflation concerns and pushed 10-year Treasury yields past the 5% threshold for the first time in nearly a year. Economic data such as a stronger-than-expected jobs report and a rise in August consumer prices have increased market confidence that the Fed will raise rates on Wednesday. Analysts predict at least one more rate hike by the end of March, indicating a shift towards a more hawkish stance.

The broader macro picture, however, suggests that further hikes may be limited. While the Bank of Japan is almost certain to raise rates on Friday, sentiment towards the yen is changing, with speculators adopting a net long position for the first time since February. Other currencies, including the New Zealand and Australian dollars, experienced slight declines against the dollar.

The yuan remained relatively stable, hovering near its strongest level in over three years, as markets await industrial output and retail sales data.