BY COMFORT OGBONNA

The U.S. dollar edged higher on Tuesday, remaining close to a two-month high as rising oil prices and a sharp increase in U.S. Treasury yields supported the currency, while investors awaited key economic data that could provide fresh clues about the Federal Reserve’s interest rate plans.

The dollar index, which measures the U.S. currency against a basket of major currencies, rose slightly to 101.27 and was on course for a 1.8% gain in September. That would mark its strongest monthly performance since June as investors increasingly expect U.S. interest rates to remain elevated.

The euro remained near its weakest level in three months at $1.1360 after European Central Bank President Christine Lagarde indicated that measured policy steps would remain appropriate as policymakers work to bring inflation under control. Sterling also weakened, falling 0.1% to $1.3242 and remaining close to a three-month low.

Oil prices provided additional support for the dollar as Brent crude futures climbed above $107 a barrel. Investors remained uncertain about efforts to end the conflict involving Iran after U.S. President Donald Trump rejected a ceasefire proposal from Tehran, raising concerns that disruptions to oil supplies could persist.

Higher oil prices can contribute to broader inflation by increasing transportation, manufacturing and energy costs. For currency markets, renewed inflation concerns can also influence expectations for interest rates, particularly in economies where central banks are still trying to bring price pressures under control.

At the same time, a sharp selloff in U.S. government bonds pushed Treasury yields to new highs. The benchmark 10-year Treasury yield reached its highest level since 2007, while the 30-year yield climbed to its highest level since 2004.

The two-year Treasury yield, which is particularly sensitive to expectations for Federal Reserve policy, also rose to its highest level in more than two years and moved closer to 5%.

Rising U.S. yields can increase the appeal of dollar-denominated assets because investors can earn higher returns from U.S. government debt relative to bonds in other major economies. That dynamic has helped support the dollar as markets reassess the outlook for U.S. monetary policy.

Joseph Capurso, head of foreign exchange at Commonwealth Bank of Australia, said the dollar could continue to strengthen if upcoming U.S. economic figures show that the American economy remains resilient.

Markets are now closely focused on a series of U.S. economic reports scheduled for later in the week. The personal consumption expenditures price index, the Federal Reserve’s preferred inflation measure, is due Wednesday, while the monthly employment report is scheduled for Friday.

Stronger-than-expected figures could reinforce expectations that the Federal Reserve will need to maintain or raise interest rates to prevent inflation from remaining above its target.

Financial markets were pricing in more than a 70% chance of a Federal Reserve rate increase at the end of October, up from about 57% a week earlier, according to market-based interest rate expectations.

The changing expectations come as central banks in other major economies also face pressure to keep monetary policy tight.

Australia’s central bank raised its benchmark cash rate to 4.60% on Tuesday, the highest level in 15 years, in a unanimous decision. Policymakers said inflation remained too high and indicated that they were prepared to raise rates further if necessary.

The Australian dollar initially strengthened following the decision, briefly reaching $0.7029 before giving up part of its gains. The currency was also affected by the broader strength of the U.S. dollar and changes in expectations for global interest rates.

The New Zealand dollar fell 0.2% to $0.5657.

The Japanese yen also weakened slightly to around 157.5 per dollar, reversing part of its gains from Monday. The currency remains under close scrutiny because of its prolonged weakness against the dollar and the possibility of intervention by Japanese authorities.

Japan’s senior currency official has warned financial markets to pay attention to recent concerns expressed by both Tokyo and Washington about excessive movements in the yen. Those warnings have kept traders cautious about the possibility of official action if the currency weakens significantly further.

The yen’s weakness has been driven in part by the wide interest-rate gap between Japan and the United States. While U.S. rates have remained comparatively high, Japan has maintained a much more accommodative monetary environment, encouraging flows into higher-yielding dollar assets.

Elsewhere in Asia, the offshore Chinese yuan was little changed at around 6.71 per dollar following limited progress from a recent U.S.-China summit.

Currency markets are likely to remain sensitive to the direction of U.S. bond yields, oil prices and incoming economic data in the coming days. Investors are particularly focused on whether the strength of the U.S. economy will continue to support higher interest rates or whether signs of slowing growth will eventually ease pressure on the Federal Reserve to tighten monetary policy further.

Original article