By Saqib Iqbal Ahmed
NEW YORK, Sept 15 (Reuters) - The dollar was firmer across the board on Tuesday as surging oil prices lifted Treasury yields and reinforced expectations that the Federal Reserve will hike interest rates this week.
U.S. 10-year Treasury yields hit peaks not seen since 2007 on Tuesday as investors girded for what many suspect will be the first in a series of rate increases from the Federal Reserve as it battles stubborn inflation.
Benchmark U.S. 10-year Treasury yields surged to a top
of 5.0266% and were last at just under 5%.
Oil prices held near a four-month peak, standing at over $105 a barrel, after Yemen's Iran-aligned Houthis launched a new wave of attacks on Saudi Arabia and Gulf-Iran talks were postponed.
Markets now see a Fed hike on Wednesday as a near certainty, with CME's FedWatch tool pricing in a more than 92% chance of an interest-rate increase.
While markets are prepared for a hike, investors should remain on alert for any surprises, said Juan Perez, senior director of trading at Monex USA in Washington.
"You have to be prepared for the unexpected ... this is a time of volatility," Perez said, adding that given Federal Reserve Chair Kevin Warsh's aversion to forward guidance, it was not unthinkable that the Fed may choose to hold rates.
Even if the Fed does raise rates, much of the good news for the dollar may already be priced in, Perez said. Much would depend on signals emerging from the press conference following the Fed decision.
"What tone are you giving us? ... Can we then think about December, think about the remainder of the year ... that's really what's going to affect the direction of the currency," Perez said.
The dollar's six-currency index rose 0.1% to 99.596, standing near its highest in about two weeks, also gaining support from weakened risk appetite as stock markets fell.
The euro was about flat on the day, at $1.1551, not far from the one-month low of $1.1523 touched in the previous session.
Sterling weakened 0.03% to $1.3494 ahead of a Bank of England interest rate decision on Thursday where consensus is widely tilted towards a hold, though future rate hikes are expected by year-end, according to data compiled by LSEG.
Data on Tuesday showed Britain's jobs market stayed weak, with vacancies at a four-year low and pay growth steady.
The dollar rose 0.4% against the yen as the Japanese currency pulled away from a seven-month high, touched a week ago. The yen briefly weakened past 155 to the dollar.
RATE HIKES AWAITED
The renewed energy-induced inflation pressures follow a U.S. jobs report that was much stronger than expected and a pickup in consumer prices for August, strengthening market conviction that the Fed will raise rates on Wednesday.
Economists polled by Reuters also expect at least one more hike by the end of March, reversing a fragile no-change consensus prior to Friday's official data showing firm inflation.
"If the Fed is viewed as beginning a new hiking cycle rather than calibrating monetary policy, monetary policy could have spillovers to risk assets," Gabriele Foà, a portfolio manager at Algebris Investments, said in a note.
In cryptocurrencies, bitcoin slipped 4% to $7,997.
(Reporting by Saqib Iqbal Ahmed in New York, Jiaxing Li in Hong Kong and Shashwat Chauhan in Bengaluru; Editing by Amanda Cooper, Jan Harvey, Chizu Nomiyama and Timothy Heritage)
