Dollar near two-month trough as US inflation data awaited

On August 10, the U.S. dollar reached near a two-month low against major currencies as investors anticipated the Federal Reserve's upcoming inflation data. The euro strengthened to $1.1558, approaching the highest point since mid-June, while the British pound remained steady at $1.3490, close to a five-week peak. The Japanese yen stabilized at 157.90 per dollar, having retreated slightly from a multi-decade low hit late last month.

The dollar index, tracking the currency against six major peers, remained unchanged at 99.6, hovering near its lowest level since June 2.

Inflation data released on Friday revealed that the U.S. economy unexpectedly shed jobs in July, with job gains for the previous two months revised downward significantly. This cooling of expectations for a Federal Reserve rate hike next month led to a decline in U.S. Treasury yields, settling at 4.637 percent for 10-year notes. Futures markets have reduced the probability of a September rate hike to around 44 percent, down from 67 percent a week earlier.

The weaker U.S. labor market signal has contributed to a decline in real-rate expectations, prolonging the dollar's downward trajectory. However, the currency's decline has not yet stabilized, with market sentiment relying heavily on the upcoming U.S. inflation data. Economists estimate that the core Consumer Price Index (CPI) will increase by 0.2 percent month-over-month in July, raising the annual rate to 2.5 percent, marking a gradual moderation in inflation. June's annual rate stood at 2.6 percent.

Producer price data released on Thursday and retail sales figures on Friday will further provide insights into the inflation outlook. While there are various factors influencing inflation, the Federal Reserve is currently maintaining a hands-off approach, waiting to assess the situation's development. Rodrigo Catril, a senior FX strategist at NAB, stated that the Fed will remain on the sidelines until clearer indications emerge.

Oil prices experienced a rise on Monday, with Brent oil futures surging by 1.4 percent to around $85 per barrel. This increase was driven by ongoing uncertainty regarding the reopening of the Strait of Hormuz, with Iran claiming that a deal with Oman to establish new shipping lanes was nearing completion. Iran also emphasized that the U.S. needed to fulfill additional conditions before finalizing the agreement.

In Asia, both the New Zealand dollar and the Australian dollar experienced a slight decline of 0.1 percent each, reaching $0.7062 and $0.5889 respectively. Market participants are eagerly awaiting the Reserve Bank of Australia's interest rate decision on Tuesday, with expectations of a holding at 4.35 percent for the remainder of the year.