The dollar hovered near an eight-week low on Friday, ahead of a crucial U.S. jobs report that could provide clues to the timing of the Federal Reserve’s interest rate cuts.
The euro held on to overnight gains after the European Central Bank cut rates in a well-timed move, but offered few hints about future easing as persistent 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 at 0453 GMT, not far from this week’s low of 103.99, the first time it has broken below 104 since April 9th.
For the week, the index was on track for a 0.54% decline following a batch of weaker macro data that prompted investors to put two quarter-point Fed rate cuts back on the table for this week. ‘year.
This saw traders position themselves for a softer non-farm payrolls report later in the day, with the possibility of jobs growth falling short of economists’ median 185,000 forecast.
The Federal Open Market Committee is not expected to make any changes at its policy meeting next week, but markets are currently quoting 50 basis points of cuts by the end of December, with the first cut likely to come in September.
“We expect the overall message from the non-farm payrolls report to be one of strength, albeit declining,” wrote Joseph Capurso, head of international economics at the Commonwealth Bank of Australia, in a client note.
“We wouldn’t characterize the U.S. labor market as weak — strong, rather than hot, would be more accurate,” he added. “As a result, market prices for the first rate cut by the FOMC in September may be pushed away, supporting a modest increase in the USD.”
The euro was unchanged at $1.0894, following 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 forecast for inflation, which is now expected to remain above the central bank’s 2% target until the end of next year.
“On the day, the fact is that the ECB was more hawkish than the pervasive narrative,” said Gavin Friend, senior markets strategist at National Australia Bank.
ECB President Christine Lagarde “has been very reticent to give any indication of further easing,” Friend added.
Sterling, meanwhile, was flat at $1.27905 on Friday, not far from the week’s high of $1.2828, its strongest level since mid-March.
The yen was also little changed on the day, at $155.60, and remained on pace for a gain of about 1% for the week.
Like the Fed, the Bank of Japan will decide policy next week, and the market is building consensus for an imminent reduction in monthly bond purchases.
Despite the recent firmness, however, the yen remains not far from the 34-year low above 160 per dollar reached in late April, which prompted Japanese officials to spend about 9.8 trillion yen ($62.9 billion) intervening in the currency market to support it.
Both the government and the BOJ are concerned that soaring import costs could ruin the hoped-for cycle of moderate inflation and steady wage increases.
Japanese Finance Minister Shunichi Suzuki
It reaffirmed
willingness to take action against excessive currency swings, but added that moderation is also necessary.
“Foreign exchange intervention should be done taking into account its necessity and effectiveness,” he said, and “should be conducted in a restrained manner.” (1 dollar = 155.7200 yen)
