The U.S. dollar remained close to a two-month high Tuesday as rising Treasury yields and elevated oil prices strengthened the backdrop for the currency. Investors are now turning toward key U.S. economic data that could determine whether expectations for additional Federal Reserve rate increases continue to build.

Dollar Gains as Yields Climb

The dollar index, which measures the U.S. currency against a basket of major peers, edged up to 101.27. It is on track for a 1.8% gain during September, which would represent its strongest monthly performance since June.

The latest advance has coincided with a sharp selloff in U.S. Treasuries. The 10-year yield has reached its highest level since 2007, while the 30-year yield climbed to its highest level since 2004. The two-year yield, which is particularly sensitive to expectations for Federal Reserve policy, also moved to its highest level in more than two years and approached 5%.

Oil Adds to Inflation and Rate Expectations

Brent crude moved above $107 a barrel as markets questioned whether renewed diplomatic efforts could bring an end to the Iran conflict. The latest pressure followed the rejection of Tehran’s ceasefire proposal by U.S. President Donald Trump.

Higher oil prices can reinforce inflation concerns and potentially strengthen expectations for tighter monetary policy. Combined with rising Treasury yields, the increase in energy prices is creating a backdrop that continues to support the dollar through expectations of relatively high U.S. interest rates.

Fed Expectations Are Shifting

Markets now see more than a 70% probability of a Federal Reserve rate increase at the end of October, up from 57% a week earlier, according to CME Group’s FedWatch tool.

The change in expectations reflects the combination of elevated energy prices, resilient economic conditions and rising market-based estimates for future interest rates. A further increase in U.S. yields relative to those in other major economies could continue to support demand for the dollar.

Jobs and Inflation Data Take Center Stage

Investors are now waiting for two major economic releases. The personal consumption expenditures price index is due Wednesday, followed by the nonfarm payrolls report on Friday. Both reports could influence expectations about how aggressively the Federal Reserve may need to respond to inflation.

Stronger-than-expected economic data could reinforce the view that the U.S. economy remains relatively resilient and that interest rates may need to remain elevated. Conversely, weaker figures could challenge the recent rise in rate expectations and potentially reduce some of the dollar’s support.

Global Central Banks Remain in Focus

The U.S. is not the only major economy adjusting to persistent inflation. Australia’s central bank raised its cash rate to a 15-year high of 4.60% on Tuesday, citing inflation that remained too high and leaving the possibility of additional increases open.

The Australian dollar briefly rose to $0.7029 following the decision before giving back some of its gains. The New Zealand dollar fell 0.2% to $0.5657, while the euro traded near $1.1360, close to a three-month low. Sterling also remained near a three-month trough at $1.3242.

Yen Remains Sensitive to Intervention Risk

The Japanese yen weakened slightly to around 157.5 per dollar, giving back part of Monday’s gains. The currency remains sensitive to official warnings after Japan’s top currency diplomat Atsushi Mimura urged markets to heed the “very clear” message delivered by Tokyo and Washington regarding yen weakness.

The possibility of intervention remains an important consideration for traders as the yen stays near historically weak levels. Meanwhile, the offshore yuan was little changed around 6.71 per dollar following limited outcomes from the latest U.S.-China summit.

What Could Determine the Dollar’s Next Move?

The dollar’s near-term direction is likely to depend on the interaction between U.S. economic data, Treasury yields, oil prices and Federal Reserve expectations. A combination of stronger economic activity and persistent inflation could reinforce the recent rise in yields and support the dollar further.

However, markets are already pricing a substantial probability of another Fed hike. The upcoming inflation and employment data will therefore be important in determining whether those expectations continue to rise or begin to moderate, making the next several trading sessions particularly significant for currency markets.