- US dollar index hits 5-week low ahead of US data
- Robust figures could challenge current Fed rate cut expectations
- Trade policy and Fed independence still in focus
- Yuan underpinned by central bank fixings, Chinese stock rally
Sept 1 (Reuters) - The dollar hit a 5-week low on Monday as investors looked ahead to a raft of U.S. labour market data this week that could affect expectations for the Federal Reserve's monetary easing path.
Traders were also assessing Friday's U.S. inflation figures and a court ruling that most of Donald Trump's tariffs are illegal, as well as the U.S. president's ongoing tussle with the Fed over his attempt to fire Governor Lisa Cook.
Money markets have recently priced an around 90% chance of a 25-basis-point Fed rate cut in September and around 100 bps of easing by autumn 2026, according to the CME FedWatch tool.
Against a basket of currencies, the dollar eased 0.22% to 97.64 , after hitting 97.552, its lowest level since July 28. It clocked a monthly decline of 2.2% on Friday.
Investors will be focussed on Friday's U.S. nonfarm payrolls report, which will be preceded by data on job openings and private payrolls.
Analysts said the U.S. economy is no longer outperforming as it did for much of the past decade, justifying a weaker dollar, and further signs of a softening labour market are expected to bolster that narrative.
"Severe weakness (in economic data) would point to an even more forceful Fed response than market pricing predicts, but if May/June weakness is revealed as a statistical mirage, rate cuts would seem unwarranted given the almost certain prospect of rising inflation over the next year or so," Societe Generale economist Klaus Baader said.
Some analysts still see the chance of a 50-bp move by the Fed later this month.
The euro was up 0.35% to $1.1724, while sterling edged 0.18% higher to $1.3528. U.S. markets are closed for a holiday on Monday.
Political risks are in focus as the French government faces likely defeat in a confidence vote over plans for sweeping budget cuts.
Analysts noted that such risks tend to weigh on the currency only when there are clear signs of contagion within the euro area, something that is not evident at the moment.
Investors are keeping a close eye on trade policy while the U.S. continues negotiations with key trading partners.
"We do not see much market impact from the court ruling," Jefferies economist Mohit Kumar said.
"The matter would pass on to the Supreme Court which is likely to rule in favour of Trump."
The greenback has also been weighed down by worries over Fed independence, as Trump steps up his campaign to exert more influence over monetary policy.
"Fiscal dominance risks should be more clearly apparent in both higher long-end U.S. inflation break-evens and a higher risk discount on the dollar, none of which is materializing yet," George Saravelos, head of forex strategy at Deutsche Bank, said.
"Fiscal dominance" refers to a scenario where central banks are pressured to ease monetary policy to help finance large budget deficits.
The dollar was flat at 147.00 against the yen after a monthly decline of 2.5% in August.
The onshore yuan <CNY=CFXS> steadied near Friday's roughly 10-month high and last stood at 7.1326 per dollar.
The yuan has drawn support from firm central bank fixings in the onshore market and a buoyant domestic stock market, even as China's economy struggles to mount a solid recovery.
China's factory activity in August expanded at the quickest pace in five months on the back of rising new orders, a private-sector survey showed on Monday, contrasting with an official survey released on Sunday that showed factory activity shrinking for the fifth straight month.
Reporting by Stefano Rebaudo and Rae Wee; Editing by Shri Navaratnam, Kim Coghill and Andrew Heaveens
Source: Reuters