Dollar Steadies as Market Focus Shifts From Jobs Shock to Key Inflation Data

The U.S. dollar steadied on Monday, recovering from a one-month low as currency markets shifted their focus from the shock of last week's weak employment data to a critical inflation report due later this week.

Dollar Rebounds After Jobs Report Sell-Off

The U.S. Dollar Index (DXY), which measures the greenback against a basket of major currencies, edged up 0.1% to 99.65. The move marks a modest rebound after a sharp sell-off on Friday, which followed the nonfarm payrolls report and pushed the index to its lowest level since June 5.

Friday's weakness was triggered by a U.S. Labor Department report showing the economy unexpectedly shed 23,000 jobs in July. Adding to the negative sentiment, data for the prior two months was revised downward by a cumulative 103,000 jobs. The bleak labor market picture prompted a significant recalibration of Federal Reserve policy expectations.

Fed Rate Hike Bets Cool

The surprisingly soft employment data has led traders to dramatically scale back bets on a near-term interest rate hike by the Federal Reserve. According to money market pricing, the implied probability of a 25-basis-point rate increase at the Fed's September 16 meeting has fallen to approximately 44%, down sharply from 67% just a week ago.

Ad

The dollar's stabilization on Monday suggests traders are hesitant to establish significant new short positions ahead of Wednesday's U.S. Consumer Price Index (CPI) report. Economists forecast that core CPI, which excludes volatile food and energy items, rose 0.2% month-over-month in July, with the annual rate expected to cool to 2.5%.

Inflation Data Now in Focus

This week's inflation data, along with producer price figures on Thursday and retail sales on Friday, will serve as a key test for whether the disinflationary trend is entrenched enough for Fed officials to keep interest rates on hold through the autumn. A softer-than-expected reading could add to pressure on the dollar, while a surprisingly high number could revive rate hike speculation.

Elsewhere, the Japanese yen weakened 0.6% to 158.76 per dollar, its lowest in over a week, as the wide interest rate differential between the U.S. and Japan continues to favor the greenback. In other emerging markets, the South Korean won led losses in Asia, falling 0.8% amid pressure from rising oil prices and a recent global sell-off in technology stocks.