Dollar Edges Higher as Oil Gains and Investors Await U.S. Inflation Data

BY COMFORT OGBONNA

The U.S. dollar edged higher against major currencies on Monday after falling to a two-month low, as rising oil prices and uncertainty surrounding the Middle East provided some support for the greenback while investors prepared for a closely watched batch of U.S. economic data.

The euro slipped slightly to $1.1551, remaining close to its strongest level since mid-June. Sterling was little changed at $1.3486, below its five-week high.

The Japanese yen weakened to 158.30 per dollar, continuing to give back some of the gains it made following increased expectations of possible intervention by Japanese authorities. The currency remains significantly stronger than its recent low of around 164 per dollar reached late last month.

The dollar index, which measures the U.S. currency against six major peers, rose 0.06% to 99.70. The index was recovering modestly after recently falling to its lowest level since June 2.

Currency markets were also responding to renewed movements in oil prices. Brent crude futures rose about 1.4% to around $85 a barrel as traders continued to assess uncertainty surrounding the possible reopening of the Strait of Hormuz.

Iran said Sunday that an agreement with Oman concerning new shipping lanes through the strategic waterway was in its final stages. Tehran also said the United States would still need to meet additional conditions before the waterway could fully reopen, leaving uncertainty over the timing of a return to normal shipping.

The Strait of Hormuz is one of the world’s most important energy routes, making developments around the waterway particularly significant for oil prices and inflation expectations.

Higher oil prices can add to inflationary pressure in major economies, potentially complicating decisions by central banks that are considering whether to lower interest rates.

The dollar’s recovery also came as investors continued to assess the implications of weaker U.S. employment data released Friday.

The U.S. economy unexpectedly lost jobs in July, while employment gains reported for the previous two months were revised sharply lower. The data reduced expectations that the Federal Reserve would raise interest rates at its September meeting.

Futures markets are now pricing in about a 44% probability of a September rate increase, down from roughly 67% a week earlier.

The shift in expectations has also weighed on U.S. Treasury yields. The yield on the benchmark 10-year Treasury note was recently around 4.637%, maintaining much of its decline following the employment report.

Investors are now turning their attention to this week’s inflation figures for further clues about the Federal Reserve’s next steps.

The consumer price index report due Wednesday is expected to show that core consumer prices, which exclude food and energy, rose 0.2% in July from the previous month. That would put the annual core inflation rate at about 2.5%, compared with 2.6% in June.

The inflation report is particularly important because investors are trying to determine whether the recent weakness in the labor market is likely to be accompanied by continued progress in reducing inflation.

“Markets need confirmation that softer labor demand is translating into sustainable disinflation rather than simply weaker growth,” said Geoff Yu, a senior EMEA market strategist at BNY.

Investors will also receive producer price data on Thursday and retail sales figures on Friday. Together, the reports could provide a clearer picture of price pressures, consumer demand and the broader health of the U.S. economy.

Economists and investors remain divided over the timing of future Federal Reserve policy changes. While weaker employment data could strengthen the case for lower rates, persistent inflation could encourage policymakers to remain cautious.

“Although there’s a lot of inflation dynamics, the Fed will for now stay on the sidelines and wait to see how things play out,” said Rodrigo Catril, a senior foreign exchange strategist at NAB.

Lower interest rates generally reduce the appeal of a currency by decreasing the returns available on assets denominated in that currency. Expectations for Federal Reserve policy therefore remain one of the most important drivers of the dollar’s direction.

In Asia, the New Zealand dollar and Australian dollar each fell 0.1%, with the New Zealand currency trading around $0.7062 and the Australian dollar around $0.5887.

Investors are also awaiting the Reserve Bank of Australia’s interest-rate decision on Tuesday. The central bank is widely expected to keep its key interest rate at 4.35% for the remainder of the year.

The Chinese yuan was little changed at 6.7440 per dollar, remaining near its strongest level in about three and a half years. The currency has benefited from improving sentiment after recent economic data showed that China’s producer-price inflation eased in July.

The combination of changing expectations for U.S. interest rates, oil-market uncertainty and developments in Asia is likely to keep currency markets volatile in the coming days.

For investors, Wednesday’s U.S. inflation report will be the week’s most important event. A softer-than-expected reading could revive expectations for a Federal Reserve rate cut and put additional pressure on the dollar, while stronger inflation could reinforce the case for keeping interest rates higher for longer.