The U.S. dollar moved slightly higher on Monday, holding above a one-month low as investors shifted their attention from Friday’s surprising U.S. jobs report to key inflation data due later this week.
The Dollar Spot Index gained 0.1% to 99.65. The index had previously fallen to its lowest level since June 5 following the release of the latest nonfarm payrolls data.
Meanwhile, the euro remained almost unchanged near $1.1550. The British pound edged 0.1% higher to around $1.3490.
Weak Jobs Report Reshapes Fed Expectations
Currency markets are reassessing the outlook for Federal Reserve monetary policy after an unexpected contraction in U.S. employment.
The dollar came under heavy selling pressure on Friday after Labor Department data showed that the U.S. economy lost 23,000 jobs in July. In addition, employment gains from previous months were revised lower by a combined 103,000 jobs.
The weaker labor market data quickly changed expectations for the Federal Reserve’s next policy move.
Money markets reduced the probability of a 25-basis-point Fed interest rate increase at the September 16 meeting to around 44%. One week earlier, the probability stood near 67%.
U.S. Inflation Data Becomes the Next Major Test
Despite Friday’s decline, the dollar recovered modestly on Monday. Traders appear reluctant to build large bearish positions before Wednesday’s U.S. Consumer Price Index report.
Economists expect core CPI to rise 0.2% month-on-month in July. If confirmed, the annual core inflation rate would ease to approximately 2.5%.
Inflation data could therefore become the next major catalyst for the U.S. dollar and Federal Reserve expectations.
The economic calendar will remain busy throughout the week. U.S. producer price data is scheduled for Thursday, followed by retail sales figures on Friday.
Together, these reports could provide important clues about whether inflation pressures are easing enough for the Federal Reserve to keep interest rates unchanged through the autumn.
Japanese Yen Falls Against the Dollar
In Asian currency markets, the Japanese yen weakened by around 0.6%, trading near 158.76 per dollar. This marked its lowest level in more than one week.
The yen has continued to lose ground following last month’s historic joint intervention by Japanese and U.S. monetary authorities.
Official dollar-selling operations previously helped pull the yen away from four-decade lows near 164 per dollar. However, the Japanese currency has gradually weakened again.
A wide gap between U.S. and Japanese bond yields continues to support the dollar against the yen.
Japanese financial markets will also be closed on Tuesday for a national holiday. As a result, traders are watching for potentially sharper currency movements because of lower market liquidity.
Higher Oil Prices Pressure Asian Currencies
Elsewhere in Asia, currencies belonging to major energy-importing economies came under additional pressure as crude oil prices moved back toward $84 per barrel.
Oil prices have remained elevated amid continued uncertainty surrounding shipping conditions in the Strait of Hormuz.
Higher energy prices can put additional pressure on countries that rely heavily on imported oil because they increase import costs and demand for U.S. dollars.
The South Korean won recorded some of the largest regional losses, falling around 0.8% against the dollar.
The currency was also pressured by continued foreign capital outflows following the recent global technology-sector sell-off. The decline triggered significant selling across South Korea’s semiconductor-heavy equity market.
With U.S. inflation, producer prices and retail sales all due this week, currency markets are likely to remain focused on whether incoming economic data supports expectations for a more cautious Federal Reserve policy outlook.
