Dollar on guard as US inflation test looms

The dollar was on the defensive on Monday after a mixed US jobs report provided little directional conviction and as market focus turned to inflation data from the world's two largest economies due this week.

The US economy added fewer jobs than expected in July, data on Friday showed, but it recorded solid wage gains and a decline in the unemployment rate.

While the dollar fell to a one-week low against a basket of currencies in the aftermath of the data, its losses were capped as the report pointed to a still-tight labour market, suggesting the Federal Reserve may need to keep rates higher for longer.

The US dollar index was last 0.08 percent higher at 102.14, edging away from Friday's low of 101.73.

Sterling fell 0.11 percent to $1.2737, while the euro lost 0.14 percent to last stand at $1.0994.

"There was a narrative in there for everyone, depending on your bias," said Pepperstone's Head of Research Chris Weston of the jobs report.

"We are seeing a cooling of the labour market, but it's not collapsing. It's doing what we hoped it would do."

US inflation data is due on Thursday, where expectations are for core inflation to have risen 4.7 percent on an annual basis in July.

"It's hard to see the pullback being big across the dollar pairs, because fundamentally the US has still got the best growth, you got a central bank which is still very much data dependant, and I think there are risks this week that the CPI number comes out above expectations," said Weston.

Also due this week is China's July inflation print on Wednesday, with traders on the lookout for further signs of deflation in the world's second-largest economy.

"(We) see the country's headline CPI to register a deflation this July after growth in consumer prices stalled in June," said MUFG analysts in a note.

"While the narrative of soft recovery in China likely remains intact in the short term, continued support from the Chinese government should boost the yuan."

The Chinese yuan hovered near a two-week low on Monday, with its offshore counterpart last 0.2 percent lower at 7.2042 per dollar.

On Friday, a Chinese official said during a press conference by the state planner that liquidity in the country's banking system would be kept reasonably ample, though investors were left wanting for more amid Beijing's slow roll out of support to revive its economy.

Elsewhere, the Australian dollar edged 0.04 percent lower to $0.6568, while the New Zealand dollar gained 0.01 percent to $0.60985.

The yen fell nearly 0.3 percent to 142.13 per dollar, after hitting a one-week high of 141.52 per dollar in early Asia trade.

The Bank of Japan debated growing prospects of sustained inflation at their July meeting with one board member saying wages and prices could keep rising at a pace "not seen in the past," according to a summary of opinions released on Monday.