The dollar hovered around eight-week lows on Friday ahead of a crucial U.S. jobs report that could give investors a better idea of when the Federal Reserve might start cutting interest rates.
The euro held on to overnight gains after the European
Central Bank cut rates in a well-telegraphed move, but offered few hints about
the outlook for monetary policy given that inflation is still above target.
The U.S. dollar index, which tracks the currency against the
euro and five other major rivals, was down 0.1 per cent at 104.05 as of 1135
GMT, not far from this week's low of 103.99, the first time it had broken below
104 since April 9.
For the week, the index was on track for a 0.54 per cent
slide following a run of weaker macro data that prompted investors to put two
quarter-point Fed rate cuts back on the table for this year.
That has seen traders positioned for a softer non-farm
payrolls report later in the day, with the possibility that jobs growth comes
in below the 185,000 median forecast of economists.
The Federal Open Market Committee is not expected to make
any change at its policy meeting next week, but markets currently price in 50
basis points of cuts by end-December, with the first cut most likely coming in
September.
"It's anyone's guess, but I think if we get a weak
number, we’re going to see further declines in bond yields - that will be good
news for stocks," Kathleen Brooks, research director at trading platform
XTB, said.
"But if we get something in the 180, 190, 200
(thousand) level, something that is basically indicating expansion in the
labour market, then we could see a bit of that turn around and the dollar
gaining some strength," she said.
EASING CYCLE
The euro was up 0.1 per cent at $1.0896, after a gain of
about 0.2 per cent in the previous session, when the ECB lowered rates by a
quarter point to kick off its easing cycle. However, staff also raised their
forecasts for inflation, which is now expected to stay above the central bank's
2 per cent target until late next year.
"On the day, the fact is the ECB came out to be more
hawkish that the pervasive narrative," said Gavin Friend, senior markets
strategist at National Australia Bank.
ECB President Christine Lagarde "was very reticent in
giving any guidance on further easing", Friend added.
Sterling, meanwhile, rose 0.1 per cent to $1.2803, not far
from the week's high of $1.2828, its strongest since mid-March.
The yen strengthened modestly, leaving the dollar 0.1 per
cent lower at 155.51 yen, and on track for a loss of about 1.2 per cent for the
week, its largest weekly slide since late April, the point at which Japanese
monetary authorities stepped into the market to prop up the yen.
Like the Fed, the Bank of Japan decides policy next week,
and consensus is building in the market for an imminent reduction in its
monthly bond purchases as a means of tightening credit conditions.
Despite recent firmness though, the yen remains not far from
the 34-year trough beyond 160 per dollar reached at the end of April, which
prompted Japanese officials to spend some 9.8 trillion yen ($62.9 billion)
intervening in the currency market to support it.
Both the government and BOJ are concerned that rising import
costs will scupper a hoped-for cycle of moderate inflation and steady wage
hikes.
Japanese Finance Minister Shunichi Suzuki reiterated a
readiness to take action against excessive currency swings, but added that
restraint was also required.
"Foreign exchange intervention should be done with its
necessity and effectiveness taken into account," he said, and "should
be conducted in a restrained manner."