The dollar hit a five-week low on Monday as investors looked ahead to a raft of US labor market data this week that could affect expectations for the Federal Reserve's easing path.
Traders were also assessing Friday's US inflation figures and a court ruling that most of Donald Trump's tariffs are illegal, as well as the US president's continuing 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 0.15% to 97.71, after hitting 97.534, its lowest level since July 28. It clocked a monthly decline of 2.2% on Friday.
Investors will be focussed on Friday's US nonfarm payrolls report, which will be preceded by data on job openings and private payrolls.
Analysts said the US 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," Societe Generale economist Klaus Baader said.
"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."
Some analysts still see the chance of a 50 basis-point move by the Fed later this month.
The euro was up 0.22% at $1.1707, while sterling rose 0.25% to $1.3537. US markets were closed for the Labor Day holiday on Monday.
Political risks are in focus as the French government faces likely defeat in a confidence vote next week over its 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.
US TRADE POLICY
Investors are keeping a close eye on trade policy while the US 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 seeks more influence over monetary policy.
"Fiscal dominance risks should be more clearly apparent in both higher long-end US inflation break-evens and a higher risk discount on the dollar, none of which is materializing yet," George Saravelos, global head of forex research 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 up 0.14% at 147.26 against the yen after a monthly decline of 2.5% in August.
The onshore yuan rose 0.1% to 7.1374, snapping a six-day falling streak. It dropped to 7.1260 on Friday, its lowest level since Trump's presidential election win in early November 2024.
"By setting the daily fixes lower, the PBoC has signalled that policymakers in China are more comfortable to allow the renminbi to strengthen in the near term against the US dollar," said Lee Hardman, senior currency analyst at MUFG.
Such a move "could be a reflection that Chinese policymakers are less concerned over downside risks to growth in the near term", he added.
