Dollar edges up with US inflation report on tap

By Saqib Iqbal Ahmed

NEW YORK (Reuters) -The U.S. dollar firmed across the board on Monday, a day before the release of a U.S. inflation report that could help determine whether the Federal Reserve lowers borrowing costs next month.

The dollar index was up 0.3% at 98.52 after last week's 0.4% fall. Against the yen, the U.S. currency traded at 148.085, up 0.2%. Japanese markets were closed on Monday for the Mountain Day holiday.

The euro was down 0.3% at $1.16123, while sterling was down 0.2% at $1.34335.

"The buck is trading a little firmer against all peers, though the moves are overall modest in nature," said Michael Brown, market analyst at online broker Pepperstone in London.

"A very modest hawkish repricing of Fed policy expectations appears to be helping the move along, likely driven by participants squaring up some positions ahead of the risk that tomorrow's CPI print presents," he said.

The dollar softened last week as investors adjusted their expectations for interest rate cuts from the Fed after soft data on U.S. jobs and manufacturing.

Fed officials have sounded increasingly uneasy about the labor market, signaling their openness to a rate cut as soon as September.

Cooling inflation could cement bets for a cut next month, but if signs emerge that U.S. President Donald Trump's tariffs are fuelling price rises, that might keep the Fed on hold for now.

"It's important to note ahead of tomorrow's data that the bar for a hawkish surprise is higher," said Francesco Pesole, FX strategist at ING. 

Pesole added that a 0.3% monthly rise in core CPI would give the Fed room to lower interest rates, given the deterioration in the labor market. 

Economists polled by Reuters expect core CPI to have risen 0.3% in July, pushing the annual rate higher to 3%. 

Money market traders are pricing in around a 90% chance of a rate cut next month, while 58 basis points of easing are priced in by year-end, implying two quarter-point cuts and around a one-in-three chance of a third.

The dollar was little swayed by Trump signing an executive order extending a pause in sharply higher U.S. tariffs on Chinese imports for another 90 days, a move that some market participants said was expected.

With the United States and China seeking to close a deal averting triple-digit goods tariffs, a U.S. official told Reuters that chip makers Nvidia and AMD had agreed to allocate 15% of China sales revenues to the U.S. government, aiming to secure export licences for semiconductors.

The Australian dollar fetched $0.6515, trading down 0.2% ahead of a rate decision on Tuesday, in which it is widely expected that the Reserve Bank of Australia will cut rates by 25 bps to 3.60%, after second-quarter inflation came in weaker than expected and the jobless rate hit a 3-1/2-year high. 

Cryptocurrencies rose, with bitcoin up 1.1% at $119,679, not far from its July 14 record of $123,153.22, after Trump's executive order on Thursday freed up cryptocurrency holdings in U.S. retirement accounts.

Ether rose 1.9% to $4,298.23, its highest since December 2021. 

(Reporting by Saqib Iqbal Ahmed; Additional reporting by Samuel Indyk and Gregor Stuart Hunter; Editing by Mark Potter, Chizu Nomiyama, Kirsten Donovan and Marguerita Choy)