Yellen thought the case for an interest rate had strengthened, however, her tone did not indicate that a rate hike was imminent.
Financial stocks, which stand to gain the most in a higher interest rate environment, rose as traders raised bets on a hike in the coming months.
The Dow Jones industrial average was last up 103.58 points, or 0.56 per cent, at 18,498.98.
The dollar hovering near a two-week high against a basket of currencies on Tuesday with investors focused on the next set of US data to see whether it supports expectations that the Federal Reserve will raise interest rates soon. The dollar surged 1.3 percent against the yen on Friday to a two-week high, its biggest one-day advance in nearly seven weeks. Consumer spending gained 0.3%, also in line with estimates.
A report from the US Commerce Department showed consumer spending, which accounts for more than two-thirds of US economic activity, rose for the fourth straight month in July.
Europe's broad FTSEurofirst 300 index .FTEU3 closed down 0.17 percent, at 1,350.4. The Fed's Stanley Fischer put the focus on this Friday's nonfarm payrolls report, suggesting that the jobs data could dictate whether a rate liftoff in September is appropriate. This will also serve as an indication that a Fed rate hike in September is still in the cards.
The yield on Italy's 10-year BTP bond rose 1.5 basis points to 1.13 percent before its planned sale of up to 7.75 billion euros of three bonds later.
Crude oil prices rebound as the United States dollar backed off a two-week high hit the day before. In commodities, the rally in the dollar and concerns about growing output after exports from Iraq in August exceeded July levels drove crude lower.
The dollar reached a 2 1/2-week high in against other top currencies in European trading. Oversupply remained a major concern with US crude stockpiles forecast to have risen by 1.3 million barrels last week, a Reuters poll showed. The pace of rate hikes is heavily dependent on USA economic data.
Prices had rallied earlier in August on hopes that the Russian Federation and Organisation of the Petroleum Exporting Countries could agree next to limit production in a bid to balance supply and demand and stabilise prices Russian Federation, which is not an Opec member, is due to join next month's informal meeting in Algeria at which participants are expected to discuss production.
Despite that, some analysts cautioned investors against taking an outright short position on oil as OPEC was likely to counteract with production freeze talk.
"The Fed is walking on a tightrope, by talking about a rate hike, but not necessarily spooking the markets". Senior officials at Shell and ConocoPhillips told an industry conference in Norway the oversupply could extend into 2017.