EZ SQUARE

Dollar languishes near 8-week low ahead of payrolls test

2024-06-07 14:19:40

By Kevin Buckland

TOKYO (Reuters) -The dollar hovered close to an eight-week low on Friday ahead of a crucial U.S. jobs report that could provide clues on the timing of Federal Reserve interest rate cuts.

The euro held on to overnight gains after the European Central Bank reduced rates in a well-telegraphed move, but offered few hints about future easing as lingering inflation clouds the outlook.

The U.S. dollar index, which tracks the currency against the euro and five other major rivals, was little changed at 104.09 as of 0453 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% slide following a run of weaker macro data that put 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.

"We expect the overall message from the non‑farm payrolls report to be one of strength, albeit ebbing," Joseph Capurso, head of international economics at Commonwealth Bank of Australia (OTC:CMWAY), wrote in a client note.

"We would not characterise the U.S. labour market as weak - strong, rather than white hot, would be more accurate," he added. "Consequently, market pricing for the FOMC's first rate cut in September may be pushed out, supporting a modest increase in the USD."

The euro was little changed at $1.0894, after a gain of about 0.2% 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% 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 (OTC:NABZY).

ECB President Christine Lagarde "was very reticent in giving any guidance on further easing," Friend added.

Sterling, meanwhile, was flat at $1.27905 on Friday, sitting not far from the week's high of $1.2828, the strongest level since mid-March.

The yen was also little changed on the day at 155.60 per dollar, and remained on track for a gain of about 1% for the week.

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.

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 spurred Japanese officials to spend some 9.8 trillion yen ($62.9 billion) intervening in the currency market to support it.

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