Dollar extends gain ahead of US inflation data

Dollar gains: The dollar edged broadly higher on Monday as risk appetite remained subdued ahead of a key US inflation report later in the week that is likely to provide further clarity on the Federal Reserve's monetary policy outlook.

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The yen was nursing deep losses from last week and struggled near the 145 per dollar level, while the risk-sensitive Australian and New Zealand dollars edged lower in a cautious start to the week.

Trading was thinned in Asia with Japan out on a holiday.

Against the yen, the dollar fell 0.22 per cent to 144.29, paring some of its gains from last week when it jumped 2.6 per cent on the Japanese currency, its best weekly performance since June 2022.

The kiwi dipped 0.05 per cent to $0.6239, after having slid 1.2 per cent last week, while the US dollar index steadied at 102.43.

The greenback's rally was underpinned by a rebound in US Treasury yields as traders tempered their expectations of the pace and scale of Fed cuts this year.

A reading on US inflation due on Thursday could again alter those views, after data on Friday showed US employers hired more workers than expected in December while raising wages at a solid clip, pointing to a still-resilient labour market.

However, a separate survey out the same day showed the US services sector slowed considerably last month, with a measure of employment dropping to the lowest level in nearly 3-1/2 years, painting a mixed picture of the world's largest economy.

"On balance, the key labour market themes remain in place. The labour market is no longer as tight as it was earlier in the recovery as signalled by slower job growth, less turnover and slower wage gains," said economists at Wells Fargo of the nonfarm payrolls report.

"That said, job growth remains solid on an absolute basis even if it has slowed on a relative one, and the low level of layoffs remains encouraging.

"We suspect the FOMC will keep the Fed funds rate unchanged over the next few months as it awaits additional confirmation that inflation is durably on its way to 2 per cent."

Market pricing now shows a roughly 64 per cent chance that the Fed could begin easing rates as early as March, compared to a nearly 90 per cent chance a week ago, according to the CME FedWatch Tool.

Elsewhere, sterling lost 0.12 per cent to last trade at $1.27035, while the euro was flat at $1.09405, after slipping 0.9 per cent last week.

The Aussie slid 0.13 per cent to $0.67055, extending its 1.5 per cent fall from last week.

A reading on Australian inflation is also due later this week.

"We do need to see some easing in the core measure, because that's really where the (Reserve Bank of Australia) is focusing," said Tony Sycamore, market analyst at IG Australia.