By Samuel Indyk and Jiaxing Li
LONDON, Sept 28 (Reuters) - The US dollar was steady near a two-month high as the US-Iran standoff continued to push up oil prices and Treasury yields, while investors looked ahead to a data-packed week for further clues about the path of central bank policy.
The dollar index, which measures the US currency against a basket of peers, was little changed at 101.14 but was still set for a 1.7% gain this month, its biggest monthly gain since June.
The euro was a shade weaker
at $1.1376, hovering near a two-month low against the dollar and on course for a 2% decline in September. Sterling was up a touch to $1.3260, but remained close to a three-month low of $1.3204 hit last week.
MIDDLE EAST DRIVES MARKETS
Oil prices climbed more than 3% on Monday with Brent crude futures last above $107 a barrel, after US President Donald Trump rejected a peace deal with Iran to resolve their conflict and reopen the Strait of Hormuz.
Energy supply risks and robust fundamentals in the US economy have heightened inflation concerns and prompted traders to price in a more hawkish Federal Reserve, while a relentless rise in long-end Treasury yields also supported the dollar.
"The greenback could overshoot in the near term if energy market tensions persist and inflation risks continue to build," said Sim Moh Siong, FX strategist at OCBC.
The bank's base case remains for a moderate dollar rally into year-end, he added.
The market's focus is set to turn to US data releases as the week unfolds, with the PCE Index on Wednesday and nonfarm payrolls on Friday both expected to be consistent with further policy tightening.
"Data could re-emerge as a primary driver for the dollar this week," said ING FX strategist Francesco Pesole.
"After a good dose of hawkish Fedspeak and Brent staying supported above $100 per barrel, markets now need fresh evidence of US economic strength to solidify expectations of an October 28 rate hike."
Currently, markets see a 65% chance of a quarter-point rate hike from the Fed at the October meeting, according to the CME FedWatch Tool, after the central bank raised its interest rate at the September meeting.
Other data for the week include China PMIs on Wednesday ahead of the week-long National Day holidays and euro zone inflation data on Friday.
YEN STRENGTHENS AFTER WARNING
The yen rose to 156.75 per dollar after Japan's top currency diplomat Atsushi Mimura said on Monday that markets should take at face value the "very clear" message Tokyo and Washington delivered last week on the yen.
Japan's Finance Minister Satsuki Katayama and US Treasury Secretary Scott Bessent reaffirmed last week that the two nations intend to strengthen cooperation to address yen weakness.
Meanwhile, data on Monday showed Japan's service-sector inflation rose in August at the fastest annual pace in more than two years, highlighting mounting price pressures and bolstering the case for faster rate hikes from the Bank of Japan.
The Australian dollar fetched $0.7016 and the kiwi was at $0.5663.
The Reserve Bank of Australia is expected to raise interest rates by 25 basis points to a near 15-year high of 4.60% on Tuesday.
Elsewhere, China's offshore yuan strengthened slightly to 6.7159 per dollar, after Trump and Chinese President Xi Jinping's three-day summit did not yield any big public breakthroughs on a host of contentious issues.
(Reporting by Samuel Indyk and Jiaxing Li; Editing by Sonali Paul and Xevi Fontdegloria)
