Dollar nears near two-month low ahead of US inflation data

The US dollar slipped towards a two-month low on Monday, ahead of forthcoming US inflation figures that could influence the Federal Reserve's interest rate trajectory. Investors were monitoring the data for insights into the Fed's potential rate move. The euro gained against the dollar, nearing its highest point since mid-June, while the British pound held steady near a five-week high.

The Japanese yen remained strong, away from a multi-decade low reached late last month. The dollar index, which gauges the currency against six key counterparts, was flat at 99.6, near its lowest level since early June. In July, the US job market contracted unexpectedly, prompting a revision of earlier monthly figures, which dampened hopes for a Federal Reserve rate hike next month.

US Treasury yields declined as investors reassessed expectations for a rate increase, with 10-year notes at 4.637%. Market forecasts now suggest a 44% probability of a September rate hike, down from a 67% chance a week prior. The weakening labor market has pressured real interest rates, sustaining the dollar's slide, though not yet resulting in a clear easing scenario.

Analysts anticipate that the US inflation data will be the primary driver of currency movements this week. The consensus anticipates a modest month-over-month increase in core CPI to 0.2% in July, pushing the annual rate to 2.5%, reflecting a gradual slowdown in inflation. June's annual rate stood at 2.6%. Upcoming data, including producer price indices and retail sales, will refine inflation outlooks.

While inflationary forces are present, the Federal Reserve is currently maintaining a hands-off approach, awaiting clearer inflation trends. Commodity prices saw a boost, with Brent crude futures climbing 1.4% to around $85 per barrel due to ongoing uncertainty regarding the reopening of the Strait of Hormuz. Iran reported progress in finalizing a deal with Oman on new shipping lanes, but noted that Iran's conditions must still be met.

In Asia, the New Zealand and Australian dollars both dropped about 0.1% to $0.7062 and $0.5889, respectively. Investors are looking ahead to the Reserve Bank of Australia's decision on interest rates, expected on Tuesday, with a likely hold at 4.35% for the remainder of the year.