US payrolls meeting on Friday will be crucial after Federal Reserve Chairman Jerome Powell steered away from the fight against inflation to a readiness to protect against job losses.
Analysts say the jobs figures will determine the magnitude of the Federal Reserve’s expected rate cuts. Markets are already pricing in a 25 basis point cut for the week.
The greenback earlier advanced to its strongest level since Aug. 20, with a rise in long-term Treasury yields leading to its biggest jump since mid-August as inflation data showed a small rate cut.
US gross domestic product figures also show the economy is on solid enough footing for the Federal Reserve to remain less aggressive in easing its policy.
Traders currently see a 33% chance of a 50-bps Fed rate cut this month, while fully pricing in a quarter-point cut. A week earlier, expectations for a bigger decline were 36%.
“These days, it’s all about the economic numbers,” said Athanasios Vamvakidis, global head of forex strategy at BofA.
“We expect the dollar to weaken in the second half of this year, but the market should not get too excited about that,” he added, flagging a euro target at $1.12.
“The US economy is slowing but still doing much better than the rest of the world.”
The dollar index gauge against six major peers weakened 0.08% to 101.67 after hitting 101.79, a level not seen since Aug. 20.
It sank to as low as 100.51 last week for the first time since July 2023 after Fed Chair Powell sent a strong message that an easing campaign will begin at the next policy meeting.
The euro rose 0.2% to $1.1060 after touching $1.1043, the lowest since Aug. 19.
On the political front in Europe, the Alternative for Germany (AfD) was on track to become the first far-right party to win a regional election in Germany since World War II, estimates show, giving it unprecedented strength even as other parties are determined. Exclude him from office.
“The only clear lesson is that the far-right AfD continues to resist the temptation of power until they get an absolute majority,” said Christian Schulz, Citi’s deputy chief European economist.
Some investors worried that political deadlock in Berlin and Paris could prevent Europe from pursuing integration initiatives that could boost growth and enable Europe to play a bigger role in global affairs.
Money markets trimmed their bets on a rate cut from the European Central Bank as August services inflation remained sticky and ECB policymakers gave no indication of additional monetary easing after a widely expected September rate cut.
They priced a rate cut by the end of the year at 59 bps — indicating a 36% chance of two 25-bps moves and a third cut — up from 67 bps after the release of German inflation data last week and from 70 bps in mid-August.
Non-Farm Payrolls
A US public holiday on Monday marked a slow start to the week for the dollar, but the coming days will see a steady stream of macroeconomic data that ends with non-farm payrolls on Friday, analysts said.
Economists polled by Reuters had expected 165,000 US jobs to be added in August, up from 114,000 in the previous month.
Analysts said the data around the consensus forecast was consistent with a soft landing and the Fed easing its policy by 25 bps this month.
“With the figure at or below 100,000, we see hard landings and market price risks in a high chance of a 50 bps rate cut,” said BofA’s Vamvakidis.
The dollar rose 0.40% to 146.74 yen.
Analysts argued that it would be difficult to see the dollar rally against the yen when the Fed is about to cut rates.
Treasury bonds will not trade on Monday due to a US holiday, but the 10-year yield was at 3.9110% following a 4.4-bp rise on Friday.
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