The US dollar weakened against all major currencies on Monday, as excitement over a better-than-expected US jobs report began to fade and investors turned cautious ahead of crucial US-China trade talks scheduled to take place later today.
Top officials from both countries will meet in London to resolve differences over an initial agreement reached last month in Geneva, which had previously eased tensions between the world's two largest economies.
The talks come at a critical time for both sides, with China facing deflationary pressures, while trade uncertainty has dampened sentiment among US businesses and consumers, prompting investors to reassess the US dollar's status as a safe haven.
"However the outcome of these trade talks plays out will be a critical factor in overall market sentiment," said Kit Juckes, Chief Currency Strategist at Societe Generale.
He said Asia-Pacific currencies including the Japanese yen, as well as the Australian and New Zealand dollars, were expected to react most sharply to any developments in the talks.
The US dollar fell 0.46% against the Japanese yen, trading at 144.16 yen after two weeks of gains.
Two sources with direct knowledge said Japan was considering buying back ultra-long-term government bonds previously issued at low interest rates, in a sign of its efforts to contain any sudden surge in bond yields.
The euro rose 0.2% to $1.1418 as markets continued to assess the European Central Bank's monetary policy statement last week, which suggested the easing policy was likely to end soon. The pound sterling rose 0.3% to $1.3558.
Elsewhere, China's offshore yuan was trading at 7.18 against the US dollar after data showed export growth fell to a three-month low in May, while producer price deflation deepened to its worst level in two years.
The New Zealand dollar rose 0.6% to $0.60555, while the Australian dollar strengthened half a percentage point to $0.6524 in light trading on the country's public holiday.
Australia's much stronger fiscal position compared to the US, attractive revenue returns and "not too bad" economic conditions will continue to support the Australian dollar, barring any negative shocks from trade talks, Juckes said.
In other trade-related developments, Japan's Chief Trade Negotiator Ryosei Akazawa is reportedly planning a sixth round of talks in Washington.
Another key report to watch this week is the US inflation report for May, which investors and Federal Reserve policymakers will be watching to gauge the true impact of tariff policy on the economy.
The Federal Reserve has previously said it is in no rush to cut interest rates, and signs that the US economy remains resilient could reinforce that stance.
Interest rate expectations now show investors expect the central bank to likely cut borrowing costs by 25 basis points, with initial expectations of policy changes starting as early as October, according to data compiled by LSEG.
