Dollar soft as investors digest 'higher for longer' path

The dollar eased from a 12-week peak on Monday as traders weighed the US monetary path after the Fed Chair Jerome Powell left open the possibility of further interest rate increases, while the yen hovered close to its lowest in over nine months.

In an eagerly awaited speech at the annual Jackson Hole Economic Policy Symposium, Federal Reserve Chair Powell promised to move with care at upcoming meetings as he noted both progress made on easing price pressures as well as risks from the surprising strength of the US economy.

"We will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data," Powell said in a keynote address.

"It is the Fed's job to bring inflation down to our 2 per cent goal, and we will do so."

The dollar index , which measures the US currency against six rivals, eased 0.115 per cent to 104.05, but not far from the 12 week high of 104.44 it touched on Friday. The index is up over 2 per cent in August and set to snap a two month losing streak.

Markets anticipate an 80 per cent chance of the Fed standing pat next month, the CME FedWatch tool showed, but the probability of a 25 basis point hike in November is now at 48 per cent versus 33 per cent a week earlier.

"It remains unlikely we get a hike from the Fed in September, said Chris Weston, head of research at Pepperstone. "But November is shaping up to be a 'live' event, where data points have the potential to throw interest rate expectations around."

"When many other G10 central banks are already priced for an extended pause, the Fed potentially going again in November is supporting the dollar," Weston said.

A series of strong US economic data releases has helped ease worries of a recession but with inflation still above the Fed's target, some investors are worried that the US central banks will keep interest rates at elevated levels for longer.

With the Fed highlighting the importance of the upcoming US economic data, investor focus this week will firmly be on reports on payrolls, core inflation and consumer spending.

"If the data continues to show an ease in labour market tightness and price pressures, then the Fed is likely done with its tightening cycle," said Rodrigo Catril, senior currency strategist at National Australia Bank. "If the data doesn't play ball, then further tightening should be expected."

The yen weakened 0.03 per cent to 146.45 per dollar, not far off the more than nine month low of 146.64 it touched on Friday as traders continue to watch out for any signs of intervention in the currency market from Japanese authorities.

The Bank of Japan will maintain its current ultra-easy policy as underlying inflation in Japan remains "a bit below" its target, the central bank's governor said on Saturday.

Meanwhile, the euro and the sterling came off two-month lows touched on Friday. The single currency was up 0.04 per cent to $1.0804, while the pound was last at $1.2599, up 0.17 per cent on the day.

The Australian dollar rose 0.55 per cent to $0.644, while the New Zealand dollar gained 0.32 per cent versus the greenback to $0.592.