Dollar near two-month high as US-Iran stalemate bolsters oil, Fed rate hike bets

The dollar index was little changed at 101.16 on Monday, putting it on track for a 1.7% monthly gain, its biggest since June. Oil prices climbed more than 3% after President Donald Trump rejected a peace deal with Iran, and Brent was last above $108 a barrel. Higher energy prices and Treasury yields supported inflation concerns and bets on tighter Fed policy.

Markets were looking ahead to US PCE data on Wednesday and nonfarm payrolls on Friday. Traders saw a 70% chance of a quarter-point rate hike at the Fed’s October meeting and were nearly fully pricing in four quarter-point hikes over the next 12 months. BBVA’s Roberto Cobo said further strong data could reinforce expectations for Fed tightening, while a modest disappointment could prompt profit-taking after the dollar’s recent rally.

The yen rose as much as 0.4% to 156.51 per dollar after Japan’s top currency diplomat said markets should take at face value a “very clear” message from Tokyo and Washington. Japan’s service-sector inflation rose in August at its fastest annual pace in more than two years. The Australian dollar traded at $0.7011, with the Reserve Bank of Australia expected to raise its rate by 25 basis points to 4.60% on Tuesday.