Dollar steady as traders await key US inflation data

The U.S. dollar maintained its stability on Tuesday as investors awaited the release of July's consumer inflation data, which could influence the Federal Reserve's upcoming policy decisions. After Friday's jobs report revealed an unexpected reduction in payrolls, traders reduced their expectations for a September rate hike. Inflation's resurgence could revive hopes for higher rates, given the central bank's struggle with inflation still exceeding its 2% target.

Conversely, further signs of disinflation may weaken expectations for rate hikes. Eric Theoret, a currency strategist at Scotiabank, noted that as long as the disinflationary trend persists, it would be challenging to argue for rate increases. Rising oil prices, attributed to an unresolved deal to reopen the Strait of Hormuz, have rekindled concerns about potential inflationary pressures, although energy prices are still below their recent highs.

Fed funds futures traders now estimate a 50% probability of a September rate hike, down from 58% a week earlier. The dollar index, which tracks the greenback against a basket of currencies, increased by 0.06% to 99.83, with the euro slipping by 0.02% to $1.154. The Japanese yen strengthened by 0.01% to 159.28 per dollar. Analysts anticipate the yen may continue to struggle until fundamentals improve and the Bank of Japan resumes rate hikes.

FX strategists suggest that the dollar could weaken if the U.S. CPI inflation data for July falls short of market expectations.