Dollar hold near two-month peak as yields rise, Fed data looms

The dollar showed strength near a two-month peak on Tuesday, buoyed by volatile oil prices and a sharp rise in Treasury yields. However, the gains were modest as traders awaited key US data this week to gauge the Federal Reserve's potential rate direction. The euro experienced a decline to a three-month low against the dollar, while the British pound remained relatively stable.

The dollar index, which tracks the US currency's performance against its peers, showed a slight increase, positioning itself for an 1.8% rise this month, marking its best monthly performance since June. Oil prices rebounded, with Brent crude futures nearing $106 a barrel, as uncertainty lingered over the effectiveness of renewed efforts to end the Iran conflict after President Trump rejected Iran's ceasefire offer.

Meanwhile, a surge in US Treasuries sales led to yields reaching record highs, with the 10-year benchmark hovering near its peak since 2007 and the 30-year reaching its highest since 2004. The yield on the two-year Treasury note also rose to its highest level in over two years, inching towards 5%. The dollar's limited gains reflect traders' cautious anticipation of forthcoming US data, with market participants growing less responsive to oil price fluctuations and a global bond sell-off diminishing the upside from higher Treasury yields.

Joe Capurso, head of foreign exchange at Commonwealth Bank of Australia, noted that forthcoming US economic data, such as the Personal Consumption Expenditures (PCE) price index on Wednesday and nonfarm payrolls on Friday, is likely to bolster the case for additional Fed rate hikes. Recent CME Group's FedWatch tool indicates a more than 70% probability of a Federal Reserve rate increase at the end of October, up from 57% a week ago.

Meanwhile, Australia's Reserve Bank is anticipated to raise interest rates later on Tuesday, leading to a slight decline in the Australian and New Zealand dollars. The Japanese yen also weakened somewhat to 157.40 per dollar, erasing some of Monday's gains following Japan's top currency policy maker Atsushi Mimura's warning that markets should heed Tokyo and Washington's stern message about the yen, sparking concerns about potential central bank intervention.

The offshore yuan remained relatively unchanged at 6.71 per dollar after a three-day summit between US President Donald Trump and Chinese President Xi Jinping yielded minimal results.