Authors: Stefano Rebaudo and Kevin Buckland
TOKYO (Reuters) – The dollar fell slightly on Monday but still held near its highest level in almost two weeks as investors turned their attention to a U.S. jobs report due later this week.
US jobs data due on Friday will be key after Federal Reserve Chairman Jerome Powell shifted focus from fighting inflation to being prepared to protect against job losses.
Analysts say the employment data will determine the scale of the Federal Reserve’s expected rate cut. Markets have been pricing in a 25-basis-point cut for weeks.
The dollar rose the most since Aug. 20, helped by a rise in long-term Treasury yields to their highest since mid-August, as inflation data pointed to a smaller rate cut and gross domestic product data showed the economy was on solid enough footing for the Federal Reserve to ease policy less aggressively.
Traders are currently giving a 33% chance of a 50-basis-point Fed rate cut this month, while fully pricing in a quarter-point cut. A week ago, expectations for a larger cut were 36%.
The gauge against its six main rivals weakened 0.10% to 101.65, after reaching 101.79 — a level not seen since Aug. 20.
The euro strengthened to $1.1062, after hitting $1.1043, its lowest level since Aug. 19.
On the European political front, 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, according to forecasts, giving it unprecedented power even as other parties are certain to oust it.
“The only clear lesson is that the far-right AfD continues to resist the temptation of power until it gains an absolute majority,” said Christian Schulz, deputy chief economist for Europe at Citi.
Some investors feared that the political stalemate in Berlin, as well as in Paris, would prevent Europe from pursuing the integration initiatives they believed were necessary to unlock its growth potential and play a greater role in global affairs.
Money markets have moderated expectations for interest rate cuts by the European Central Bank as services inflation remained high in August and ECB policymakers gave no indication of further monetary policy easing after a widely expected rate cut in September.
Prices include a 59 basis point cut in interest rates by the end of the year, compared with 67 basis points immediately after the German inflation data was released and 70 basis points in mid-August.
NON-FARM WAGES
Analysts say Monday’s US bank holiday could mean a faint start to the week for the dollar, but a steady flow of macroeconomic data is expected in the coming days, culminating in the release of non-farm payrolls data on Friday.
Economists polled by Reuters predict the U.S. will add 165,000 jobs in August, down from 114,000 the previous month, and the unemployment rate will fall to 4.2%.
“If the U.S. economy creates 150,000 or more jobs and the unemployment rate falls to 4.2% or lower, that would increase confidence that the economy is on track for a soft landing,” IG analyst Tony Sycamore said, confirming expectations for a 25 basis point rate cut this month.
However, Sycamore believes the dollar’s recent strength against the yen is unlikely to last.
“To mitigate downside risk, the pair would need to achieve a sustained breakout of the 152.00 resistance level,” he said.
Treasury bonds will not trade on Monday due to a U.S. holiday, but the yield on the 10-year note was at 3.9110% after rising 4.4 basis points on Friday.
The dollar rose 0.05% to 146.26 yen.
The dollar index fell to 100.51 last week for the first time since July 2023 after Federal Reserve Chair Powell sent a mighty signal that a monetary easing campaign would begin at an upcoming policy meeting.
