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Dollar weakens on declining Fed rate hike expectations

Frank van den Bergh | E+ | Getty Images

The dollar fell against a basket of currencies on Monday, undermined by recent soft U.S. economic data that tempered expectations of a Federal Reserve interest rate hike this year.

The dollar, which has fallen in four of the last five trading sessions, also slipped against the yen, a trend that has been in place for much of this year, with investors generally underwhelmed by Japan's recent stimulus measures.

The U.S. currency was 0.09 percent lower at 101.21 yen after losing 0.6 percent on Friday, when U.S. retail sales and producer prices came in weaker than expected. The euro was up 0.16 percent at $1.1182, having risen 0.2 percent on Friday.

The dollar index was weaker at 95.60 after dropping to 95.254 on Friday, its lowest level since Aug. 3.

U.S. Treasury yields slid on Friday, with the 10-year yield falling 5 basis points to a two-week low of 1.48 percent. It traded a little higher percent on Monday.

"As it stands now, market participants see a less than 50-50 chance of rates rising by December. The dollar will continue to struggle until that chance rises meaningfully," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

Federal funds futures implied traders saw a roughly 43 percent chance on Monday that the central bank would increase rates at its December policy meeting, according to the CME's FedWatch tool. That was down from 45 percent late on Friday.

Traders said the minutes from the Fed's July policy meeting, due to be released on Wednesday, could give investors more clues as to the direction of monetary policy.

The Fed raised rates in December for the first time in nearly a decade and signaled it would do so another four times this year. It scaled that back to two hikes due to a global growth slowdown, financial market volatility and generally muted U.S. inflation.

The Labor Department is due on Tuesday to release consumer price data for July. The consensus forecast is for consumer inflation to be unchanged last month, down from 0.2 percent in June, according to a Reuters poll of analysts.

Annual headline inflation is also expected to slow amid lower oil prices.. Productivity data last week indicated subdued inflationary pressures, underpinning expectations the Fed will be in no hurry to raise rates.

Markets, meanwhile, showed little overall reaction to data on Monday showing Japan's economy expanded 0.2 percent year on year in the second quarter, well below expectations for a 0.7 percent expansion..

"Exchange rates continue to wreak havoc with Japanese exporters' efforts, and given the recent appreciation of the yen the problem will not improve in the near future," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

The Australian dollar was 0.44 percent higher at US$0.7681, having risen to a three-month high of $0.7760 last week thanks in part to the country's relatively higher debt yields.