Dollar near two-month trough as US inflation data awaited

The U.S. dollar slid to a two-month low on Monday, awaiting crucial inflation data that could shape the Federal Reserve's interest rate direction. The euro strengthened to $1.1558, nearing its best level since mid-June, while the British pound held steady at $1.3490, close to a five-week high. The Japanese yen remained stable at 157.90 per dollar, after a brief dip to multi-decade lows. The dollar index, tracking six major currencies, showed minimal movement at 99.6, near its lowest since June 2.

In July, the U.S. economy unexpectedly shed jobs, and prior months' gains were revised downward, dampening expectations for a Federal Reserve rate increase. U.S. Treasury yields fell, with the 10-year notes trading at 4.637%. Futures markets had reduced the probability of a September rate hike to around 44%, down from 67% a week prior.

The weaker labor market signal has dampened real-rate expectations, prolonging the dollar's decline. However, the final move to a cleaner easing scenario remains uncertain, depending on how investors interpret the upcoming U.S. inflation data. Core CPI is projected to rise 0.2% month-over-month in July, raising the annual rate to 2.5%, showing a gradual slowdown in inflation. June's annual rate was 2.6%.

Producer prices and retail sales figures will provide further insight into inflation expectations. Despite multiple inflation indicators, the Federal Reserve will likely remain on the sidelines until more clarity emerges. Market participants are also anticipating the Reserve Bank of Australia's rate decision on Tuesday, where policymakers are expected to maintain the key rate at 4.35% for the remainder of the year.