The dollar came under pressure after data released on Friday showed that the U.S. economy unexpectedly lost jobs in July, while employment gains for the previous two months were sharply revised downward.
The weaker-than-expected labour market figures have reduced expectations of an immediate interest rate increase by the Federal Reserve and shifted investors’ attention to Wednesday’s consumer price index (CPI) report.
“It (the labour market data) was a negative event for the dollar,” said Francesco Pesole, FX strategist at ING.
“We think the bias remains negative this week but if we get a hot break on CPI, markets are going to be back to pricing in a rate hike as their baseline.”
Markets Cut Rate-Hike Expectations
The futures market has significantly reduced the probability of a September rate move, with expectations falling to around 44% from 67% a week earlier.
U.S. Treasury yields also largely maintained their declines following the employment report, which weakened expectations for a rate hike. The yield on benchmark 10-year Treasury notes was last recorded at 4.647%.
Investors are now closely watching the inflation data for evidence of whether price pressures remain strong enough to influence the Federal Reserve’s policy direction.
Economists expect core CPI, which excludes food and energy prices, to increase by 0.2% month-on-month in July. The annual rate is forecast to ease to 2.5%, compared with 2.6% in June.
Additional economic indicators due later in the week, including producer price data on Thursday and retail sales figures on Friday, are also expected to provide further clues about the strength of the U.S. economy and the inflation outlook.
Major Currencies Trade Within Recent Ranges
The euro was little changed at $1.1563, remaining close to its strongest level since mid-June. Sterling was also steady at $1.3496, although it remained below a three-and-a-half-week high recorded recently.
The Japanese yen weakened to 158.52 per dollar as it continued to give back some of the gains recorded after intervention concerns. Despite the decline, the yen remained well above the roughly 164-per-dollar level reached late last month, its weakest level in several decades.
Data released on Friday by the Commodity Futures Trading Commission showed that speculators had sharply reduced their bearish positions on the yen.
The net short position fell by $8.865 billion to $3.604 billion in the week to August 4, marking the largest absolute weekly decline since March 2014.
The dollar index, which measures the greenback against six major currencies, was little changed at 99.62 after touching its lowest level since June 15 on Friday.
Despite the recent weakness in the dollar, CFTC data showed that speculators increased their net long position in the currency during the latest week to its highest level since December 2022.
Investors Monitor Iran and Strait of Hormuz
Beyond U.S. monetary policy, investors are also keeping a close watch on developments surrounding Iran and efforts to reopen the Strait of Hormuz, a major global energy shipping route.
Oil prices moved higher on Monday, with Brent crude futures gaining about 0.4% to around $84 per barrel amid continued uncertainty over the reopening of the strait.
Iran said a proposed agreement with Oman concerning new shipping lanes was under consideration, but added that the United States would still need to meet other conditions. The uncertainty has complicated expectations about the future flow of energy supplies.
Australian Dollar, Yuan Remain Firm
The Australian dollar was little changed at $0.7071 ahead of the Reserve Bank of Australia’s monetary policy decision on Tuesday.
The central bank is widely expected to keep its key interest rate at 4.35% for the remainder of the year.
Meanwhile, the Chinese yuan held steady at 6.7440 per dollar, remaining close to its strongest level in three-and-a-half years.
The yuan’s strength came after data showed that China’s producer price inflation eased last month, adding to the broader market focus on inflation trends and their potential impact on monetary policy.