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

The US dollar achieved a near two-month high on Tuesday due to surging Treasury yields and volatile oil prices, though gains were restrained as traders awaited upcoming US data for insights into the Federal Reserve's interest rate trajectory. Meanwhile, the euro slipped to its weakest level in three months at $1.1367 following the European Central Bank's chief hinting at cautious steps to curb inflation.

The British pound remained stable at $1.3248, also near a three-month low. The dollar index, gauging the US currency against a group of peers, saw a slight uptick at 101.2, on course for a 1.8% increase this month, the best performance since June. Oil prices rebounded, with Brent crude futures nearing $106 a barrel as markets questioned the success of renewed efforts to end the Iran conflict after US President Donald Trump dismissed Tehran's ceasefire offer.

Simultaneously, a deepening sell-off in US Treasuries drove yields to record highs, with the 10-year benchmark at its peak since 2007 and the 30-year at its highest since 2004. The two-year yield, which is sensitive to monetary policy, also surged to its highest level in over two years, nearing 5%. This dollar strength is currently limited as investors await forthcoming US data, and markets have grown accustomed to oil fluctuations, while a global bond sell-off has diluted the impact of higher Treasury yields on the dollar, noted Joseph Capurso, the head of foreign exchange at the Commonwealth Bank of Australia.

"We're more likely to see stronger US economic data indicating that the US economy is exceptional, which could spur US interest rates higher compared to other economies and further bolster the US dollar," he added. Upcoming US data releases, such as the PCE price index on Wednesday and nonfarm payrolls on Friday, are anticipated to bolster the likelihood of additional Fed rate hikes.

Market forecasts now indicate a more than 70% probability of a Fed rate hike at the end of October, up from 57% a week prior, according to CME Group's FedWatch tool. The Reserve Bank of Australia is anticipated to lift the key rate later on Tuesday, with the Australian dollar and New Zealand dollar both sliding 0.1% to $0.7013 and $0.5660, respectively.

The Japanese yen weakened marginally to 157.40 per dollar, erasing some of Monday's gains as concerns over potential Japanese intervention mounted after Tokyo and Washington issued a "very clear" warning to the yen last week. The offshore yuan remained stable at 6.71 per dollar following the inconclusive outcome of President Trump and Chinese President Xi Jinping's three-day summit.