The dollar edged up and U.S. Treasuries prices fell on Tuesday as rising U.S. inflation drove speculation that the Federal Reserve, which is meeting this week, may raise interest rates sooner than global investors have been expecting.
Wall Street stocks rose modestly, as investors shrugged off the turmoil in Iraq and kept an eye on the Fed as it began its two-day policy meeting.
The S&P 500 ended near its record high after three days of gains. The inflation data helped bank shares, with the S&P Financial index up just shy of 1 percent.
The Dow Jones industrial average rose 27.48 points or 0.16 percent, to end at 16,808.49. The S&P 500 gained 4.21 points or 0.22 percent, to 1,941.99. The Nasdaq Composite added 16.13 points or 0.37 percent, at 4,337.23.
The U.S. Labor Department said its Consumer Price Index rose 0.4 percent last month. The gain was the largest since February 2013 and topped expectations for a 0.2 percent rise, following a 0.3 percent advance in April.
"It was a much stronger print than the market was expecting, and many are thinking that may lead to a more hawkish tone tomorrow," said Michael Pond, head of global inflation-linked research at Barclays in New York.
Fed officials are expected to trim their bond-buying program further at the conclusion of their meeting on Wednesday, although the Fed is not expected to raise interest rates until mid-2015.
The U.S. dollar rose, with the dollar index up 0.17 percent. Against the Japanese yen, the dollar was ahead 0.29 percent at 102.13 yen.
"If the Fed decides to be less dovish, that could give a bid to the dollar," said currency strategist Sebastien Galy at Societe Generale in New York.
U.S. Treasuries' prices fell on the CPI data, which analysts said may give the Fed more confidence in accelerating an end of its ultra-low interest rate regime.
Benchmark 10-year notes fell 15/32 in price to yield 2.653 percent, up from 2.60 percent late on Monday. Thirty-year bonds dropped 27/32 in price to yield 3.443 percent, up from 3.40 percent.
Investors have been closely monitoring the situation in Iraq, worried that it could lead to sharply higher oil prices for an extended period.
"The Iraq situation could continue to destabilize markets, and there are a lot of unknown factors that could keep oil prices elevated. That said, valuations for stocks are not alarmingly high, and there aren't many alternatives for investors," said Bernard Baumohl, a managing director at the Economic Outlook Group in Princeton, New Jersey.
Stocks on world markets were mixed. An index of European shares gained 0.3 percent, while the MSCI index of world stock markets added 0.1 percent.
Brent oil held steady above $113 per barrel, with Brent crude for August delivery up 41 cents to $113.36 per barrel. U.S. light crude was off 72 cents at $106.18.
U.S. gold futures' most-active contract slipped $4.80 to $1,270.40 an ounce.