The US dollar showed uneven trading on Monday as rising expectations for near-term Federal Reserve action were tempered by broader concerns over inflation, with heightened geopolitical tensions in the Middle East adding to global price pressures that could force major central banks to tighten policy in tandem. Sentiment shifts regarding the Japanese yen, along with worries over the expanding US fiscal deficit and policy unpredictability, also served as a headwind for the greenback. With US markets closed for a holiday on Monday, foreign exchange activity in the Asian session was relatively subdued, making it difficult for the dollar to sustain the brief advance it posted following Friday’s robust US nonfarm payrolls report.

In early trading, the euro edged up 0.1% to $1.1618, while the British pound held steady around $1.3519. The dollar index, which measures the currency against a basket of peers, slipped 0.07% to 99.09, keeping it within close reach of its recent low of 98.558. Market pricing currently indicates roughly a 60% probability that the Fed will raise rates in September following the jobs data, and much of that outlook now hinges on the upcoming inflation figures due for release on Friday.

"A hot CPI print would all but confirm a September hike and provide support for the dollar. Conversely, a weak reading would bolster the case for holding rates steady and leave the greenback vulnerable to a repricing of dovish Fed policy," noted Elias Haddad, global markets strategy head at BBH. He added that even if a September move becomes a certainty, the prospect of the dollar achieving new cyclical highs remains uncertain. "Tightening by other major central banks limits the policy divergence that could drive the dollar higher," Haddad explained.

Persistent upward pressure on oil prices is a primary factor behind the European Central Bank's widely anticipated decision on Thursday to raise its deposit rate to 2.75%. Futures markets are also pricing in a 75% likelihood of another quarter-point increase to 3.0% by December. In parallel, market expectations point to a 75% chance that the Bank of Japan will hike rates by 25 basis points at its September 18 meeting, with a further 60% probability of another move before the end of the year.

The yen strengthened more than 0.2% against the dollar on Monday, trading at 155.88, extending its recent gains. This followed comments from an economic advisor to Japanese Prime Minister Takaichi Sanae predicting a rate hike this month. Over the previous week, the yen had appreciated over 2%, supported by factors including the unwinding of carry trades and expectations of capital repatriation.

Eric Robertsen, global head of research and chief strategist at Standard Chartered, observed that despite rising global borrowing costs, carry trades have been one of the strongest performing macroeconomic strategies year-to-date. However, the yen's recent strength "could pose a threat to the excess returns of carry trades." He added that sustained yen appreciation "could signal that rising interest rates in both Japan and the US are starting to trigger shifts in asset allocation."

Elsewhere, the Australian dollar rose 0.12% to $0.7208, while the New Zealand dollar held steady at $0.5880. Bitcoin remained stable above the $80,000 mark, last quoted at $80,145.95, finding support as investors diversify away from the US dollar into other assets.