Dollar hovers near two-month low as weak US jobs data reshapes Fed rate outlook, inflation in focus

The US dollar hovered near a two-month low on Monday as investors pared back expectations of a Federal Reserve rate hike after a surprisingly weak US jobs report, shifting attention firmly to this week’s inflation data for clearer signals on the central bank’s next policy move.

The euro edged up to $1.1558, staying close to its strongest level since mid-June, while sterling held steady at $1.3490, near a five-week high. The dollar index, which tracks the greenback against six major peers, was largely flat at 99.6 — hovering near its lowest level since June 2.

The Japanese yen traded at 157.90 per dollar, giving up some gains made after recent intervention by Japan and the United States, but still holding well above its late-July lows near 164 — a level that had marked multi-decade weakness.

Weak US jobs data deepens dollar pressure

The dollar has been under sustained pressure since Friday after data showed the US economy unexpectedly lost jobs in July, raising fresh concerns over the resilience of the labour market.

The economy shed 23,000 jobs during the month, sharply missing expectations for an increase of around 80,000. Previous readings were also revised lower, adding to signs of weakening momentum. The unemployment rate eased slightly to 4.1 per cent, though analysts noted the decline was partly driven by lower labour-force participation.

More from Business

The surprise contraction has significantly altered interest-rate expectations, with markets now scaling back bets on a Federal Reserve hike at its September meeting.

According to Reuters, traders are pricing in a 44 per cent probability of a September rate increase, down from about 67 per cent a week earlier. US Treasury yields also slipped, with the benchmark 10-year yield last seen around 4.637 per cent.

The softer labour data has now pushed inflation back to the centre of the policy debate, as investors reassess how long the Fed can maintain a restrictive stance.

Inflation prints to set tone for Fed path

All eyes are now on the US consumer price index (CPI) for July, due on Wednesday, which could prove decisive for near-term rate expectations.

Economists expect core CPI — which strips out food and energy — to rise 0.2 per cent month-on-month, easing annual core inflation to 2.5 per cent from 2.6 per cent in June.

A weaker reading would likely reinforce expectations that the Fed will hold rates steady in September, adding further pressure on the dollar. A stronger-than-expected print, however, could revive bets that interest rates will remain higher for longer, offering the currency some support.

The inflation data will be followed by producer price figures on Thursday and retail sales on Friday, together providing a broader read on price pressures and consumer demand in the US economy.

Yen steadies after intervention-driven rebound

The Japanese yen remained relatively firm after recent intervention by Japanese authorities and the US aimed at slowing its sharp depreciation.

The currency had weakened to around 164 per dollar late last month before intervention helped reverse part of the losses. While it has since eased slightly, it remains far stronger than its recent multi-decade lows.

Markets are also watching for any potential policy shift from the Bank of Japan later this year, which could add another layer of volatility to currency markets.

Oil gains add inflation uncertainty

Oil prices rose on Monday, adding fresh uncertainty to the global inflation outlook.

Brent crude futures climbed about 1.4 per cent to roughly $85 a barrel amid concerns over the security of the Strait of Hormuz. Iran said talks with Oman on alternative shipping routes were in their final stages, though it indicated the United States would still need to meet additional conditions.

The Strait of Hormuz is a critical global energy chokepoint, and any disruption could keep oil prices elevated, complicating efforts to bring inflation under control.

Higher energy costs could also limit the Federal Reserve’s room to pivot towards a more accommodative stance, even as signs of weakness emerge in the US labour market.

Asia-Pacific currencies edge lower

In Asia-Pacific trade, the New Zealand dollar slipped 0.1 per cent to $0.7062, while the Australian dollar also fell 0.1 per cent to $0.5889.

Investors are now awaiting the Reserve Bank of Australia’s policy decision on Tuesday, with the central bank widely expected to keep its key rate unchanged at 4.35 per cent for the rest of the year.

For global currency markets, however, the immediate focus remains firmly on US inflation data. With a weakening labour market, shifting Fed expectations and still-elevated energy prices, volatility in the dollar and other major currencies is expected to persist as traders reassess the US interest-rate outlook.

With inputs from agencies.