Dollar Slides as Markets Await Crucial Inflation Data

The US dollar saw a slight decline in European trading as investors waited for June's key inflation reading, specifically the Personal Consumption Expenditures (PCE) price index. Economists expect the PCE to cool to 3.7% year-on-year from 4.1%, which could have significant implications for US interest rates.

The yen strengthened to 162.88 per dollar ahead of Friday's Bank of Japan decision, where most economists predict policy rates will remain at 1%. The yen's performance is closely tied to the US economy, particularly US yields, and a softer-than-expected PCE reading could lead to rate cuts or delayed hikes in the US.

This would cause short-term US yields to shift, which can have a ripple effect on the dollar index and other major currencies priced off the same US rate path. With the odds of the Fed holding rates again in September at 34.8%, according to CME's FedWatch tool, markets are closely watching the PCE reading for any signs of inflation cooling.