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

The US dollar index has been hovering near a two-month low against major currencies as investors await this week's inflation data for clues on the Federal Reserve's rate path. The euro has edged higher against the dollar, nearing its strongest level since mid-June, while the British pound has been relatively stable near a five-week peak.

The Japanese yen has held firm around 157.90 per dollar, having retreated from a multi-decade low hit late last month. The dollar index, which tracks the currency against six major peers, has remained virtually unchanged at 99.6, hovering near its lowest level since June 2.

A weak US jobs report in July has dampened expectations for a Federal Reserve rate hike next month, with the US economy unexpectedly shedding jobs. This has led to a decline in US Treasury yields, with the benchmark 10-year note at 4.637%. The chance of a September rate hike has been scaled back to around 44% from 67% a week ago. The weaker labor-market signal has dampened real-rate expectations, prolonging the dollar decline, but a clean easing story has yet to materialize.

Geoff Yu, a senior EMEA market strategist at BNY, noted that perceptions surrounding the upcoming inflation data will be the biggest factor influencing currencies this week. The consensus estimate calls for a modest rise in the core Consumer Price Index (CPI) in July, with the annual rate expected to be 2.5%, up from 2.6% in June.

Producer price data released on Thursday and retail sales figures on Friday will provide further insights into the inflation outlook. While there are multiple inflation dynamics at play, the Federal Reserve is expected to maintain a hands-off approach until they can assess the situation.

Market participants are currently awaiting the Reserve Bank of Australia's rate decision on Tuesday, with the central bank likely to keep its key rate at 4.35% for the remainder of the year.