By Peter Nurse

Investing.com – The dollar edged higher in early European trade Monday with attention returning to the outlook for U.S. inflation and the Federal Reserve’s monetary policy as concerns over the global economic recovery ease.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 92.207, after touching a three-month top of 92.844 last week when risk aversion was at its height.

USD/JPY was largely flat at 110.16, EUR/USD fell 0.1% to 1.1867, edging back from its three-month low of $1.1781 seen last week, GBP/USD dropped 0.1% to 1.3893, while the risk-sensitive AUD/USD fell 0.2% to 0.7474, above Friday's seven-month low of 0.7410.

The dollar posted strong gains throughout most of last week, helped by its safe haven status amid worries that the fast-spreading delta variant of the Covid-19 virus could hamper the global economic revival.

However, this demand largely subsided on Friday, helped by China’s decision to cut banks' reserve requirement ratio to underpin a recovery that looked like it was losing momentum.

“We are still inclined to see the current market correction as temporary and see room for a return to a positive recovery story in 3Q, which should – in our view – fuel a recovery in activity currencies,” said analysts at ING, in a note.

Attention this week is set to turn back to the outlook for U.S. inflation and the speed of the Federal Reserve's future policy tightening, with Tuesday seeing the release of consumer price data and Wednesday the release of factory gate price data. Additionally, Fed Chair Jerome Powell is set to testify in front of Congress on both Wednesday and Thursday.

Any signs that inflation could be more persistent than previously thought could lift expectations the Fed may quickly rein in its very easy monetary policy, supporting the dollar.

Elsewhere, USD/CNY fell 0.1% to 6.4746, with China set to release a deluge of economic data this week, including figures on trade, retail sales and industrial output.

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Last week’s sudden easing in policy last week has raised concerns that this figures will show a slowing in the country’s recovery from the pandemic.

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