By Gregor Stuart Hunter and Harry Robertson
SINGAPORE/LONDON, Sept 11 (Reuters) - The dollar held near its highest levels of the past week on Friday after conflict in the Middle East pushed up oil prices and bond yields ahead of the release of U.S. inflation figures later in the day.
The U.S. dollar index, which measures the currency against six peers, was trading flat at 99.09, after rising 0.4% the previous day.
Thursday's dollar rally followed the release of data showing U.S. producer prices rose
in August as energy prices rebounded during the month, boosting bets on U.S. rate hikes.
Brent crude oil prices were set for their biggest weekly rise since July, at 10%, after Iran-aligned Houthis seized control of Yemen's port city of Mocha and advanced down the Red Sea coast to strategic islands.
Energy prices dipped on Friday, with Brent down 2% at $105 a barrel after climbing to its highest level since May on Thursday close to $110.
"Developments in the Gulf leave the balance of risks skewed towards higher oil prices, while stress in bond markets is increasingly bleeding into risk assets," said Francesco Pesole, currency strategist at ING.
"That combination should favour a defensive rotation back into the dollar."
The euro was very slightly lower against the dollar at $1.161, while the pound inched upwards to $1.352 after data showed British growth beat expectations in July.
CPI DATA TO INFLUENCE FED OUTLOOK
Markets were awaiting the release of U.S. CPI at 8:30 a.m. ET (1230 GMT), one of the last major data points before the Federal Reserve meets next week. The data is likely to show that consumer prices accelerated in August as the cost of gasoline rebounded.
Fed funds futures are pricing a roughly 70% probability of a 25-basis-point hike on September 16, compared with around a 60% chance a week earlier, according to the CME Group's FedWatch tool.
A roiling global bond selloff gathered pace again on Thursday as traders priced in more rate hikes around the world, pushing the benchmark 10-year U.S. Treasury yield near the closely watched 5% level as investors also worried about high government debt levels.
"The main focus in financial markets at the end of this week is the deepening sell-off in global bond markets, although the spillovers into the FX market have been modest," said Lee Hardman senior currency analyst at MUFG.
The U.S. dollar was down 0.1% against the Japanese yen at 154.22 and on track for its second consecutive week of declines.
The Japanese currency regained some strength after data released on Friday showed wholesale inflation remained elevated in August, bolstering the case for a rate hike this month.
The Bank of Japan is set to raise interest rates next week, most likely by 25 basis points, and may signal faster future tightening if price pressures heighten risks of an inflation overshoot, four sources familiar with its thinking told Reuters.
(Reporting by Gregor Stuart Hunter in Singapore and Harry Robertson in London; Editing by Jamie Freed and Sam Holmes)
