Dollar inches higher as 10-year Treasury yield climbs to highest since 2007

By Jiaxing Li

HONG KONG, Sept 15 (Reuters) - The dollar strengthened towards a two-week high on Tuesday, as surging oil prices pushed Treasury yields to fresh peaks since 2007, and cemented expectations for a Federal Reserve rate hike this week.

The benchmark U.S. 10-year Treasury yields reversed an earlier loss and climbed to a high of 5.0266% in Asian trading hours, the highest since 2007.

Oil prices held near a four-month peak, standing at $107 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 roughly 93% chance of an interest-rate increase.

"The combination of higher oil, higher U.S. yields and weaker risk appetite helped lift the U.S. dollar broadly," Christopher Wong, an FX analyst at OCBC, said in a note.

Near-term support may persist, but with a hike now heavily priced in, further dollar upside will likely require the Fed to keep the door open to additional tightening, he added.

Pressured by broad greenback strength, the euro hovered near a one-month low at $1.535 and sterling was 0.1% weaker at $1.3485.

The yen also pulled away from a seven-month high, standing down roughly 0.4% at 154.91 ahead of an expected Bank of Japan rate hike on Friday.

The New Zealand dollar dipped 0.3% to a two-month low of $0.5757, while the Australian dollar was also 0.2% lower at $0.7120.

The dollar's six-currency index rose 0.15% to 99.633, also gaining support from weakened risk appetite as shares markets tumbled.

RATE HIKES AWAITED

The renewed energy-induced inflation pressures follow a 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.

The inflation outlook now hinges on oil prices, but the broader macro picture does not warrant more hikes than currently priced in the curve, analysts at BCA said in a note.

"Limited hawkishness from here argues for curve steepeners and limited USD upside."

Markets are also all but certain that the Bank of Japan will raise rates on Friday. Market sentiment on the yen is starting to shift, with speculators turning to a net long position on the Japanese currency for the first time since February.

Offshore yuan was flat at 6.708 per dollar, hovering near its strongest in more than three years, after data showing China's industrial sector regained strength in August, though consumption remained sluggish.

(Reporting by Jiaxing Li in Hong Kong; Editing by Edwina Gibbs and Clarence Fernandez)