Dollar Ticks Higher, Still Near 2-Month Low

The dollar index edged up to 99.7 on Monday, following a 0.4% decline last week that pushed the greenback to a two-month low. Traders are now awaiting this week’s CPI report for further clues on inflationary pressures, after Friday’s weaker-than-expected jobs report reduced expectations for a Fed rate hike in September. The odds of such a move currently stand at around 46%, down from approximately 64% a week ago, while the probability of the Fed holding rates is seen at about 54%. Meanwhile, traders continued to assess developments in the Middle East and ongoing talks to reopen the Strait of Hormuz, although a deal between the US and Iran appears unlikely in the near term. The dollar was mostly higher against the yen, with the Japanese currency giving back some of its intervention-driven gains while remaining well above the multi-decade low hit late last month.

The dollar index hovered around 99.6 on Monday after sliding sharply in the previous session, pressured by weaker-than-expected US employment data that lowered expectations for a near-term Federal Reserve interest rate hike. Nonfarm payrolls unexpectedly declined by 23,000 in July, while steep downward revisions to the prior two months further signaled a deterioration in labor market conditions. Markets now see around a 44% probability of a 25 basis point rate hike in September, down from 67% a week earlier. Investors are now turning their attention to key inflation data due this week for additional clues on the monetary policy outlook. Meanwhile, markets continued to track developments in the Middle East as Iran denied holding direct talks with the US, despite Washington’s claims that a deal was imminent. Tehran also maintained demands for an end to the US naval blockade, the lifting of sanctions and compensation for war-related damage before agreeing to any deal.

The dollar index fell 0.5% to 99.4 on Friday, near a two-month low, after weaker-than-expected US employment data reduced expectations that the Federal Reserve will need to raise interest rates in the near term. Nonfarm payrolls unexpectedly fell by 23,000 in July, while substantial downward revisions to the previous two months pointed to a weakening labor market. The unemployment rate edged down to 4.1%, although labor force participation continued to decline. The data reinforced concerns that employment conditions are deteriorating amid persistent price pressures and uncertainty linked to the Iran conflict, while also increasing the likelihood that the Fed could delay further tightening. Investors subsequently reduced bets on a September rate hike. Meanwhile, President Donald Trump said negotiations between Iran and Oman over the Strait of Hormuz were “moving along,” although no agreement has been finalized.