Dollar hovers near 8-week low as payrolls test looms

The U.S. dollar remained near its lowest level in eight weeks on Friday, as investors awaited the release of the U.S. jobs report, which is expected to provide insights into the timing of Federal Reserve interest rate cuts.

Meanwhile, the euro held onto its gains from the previous day, following the European Central Bank’s decision to lower rates. However, the central bank did not provide clear indications of further easing measures, as concerns about inflation continue to impact the economic outlook.

The U.S. dollar index, which measures the currency against the euro and other major currencies, remained largely unchanged at 104.13 in early Asian trading. This is not far from the week’s low of 103.99, which was the first time the index had fallen below 104 since April 9.

For the week, the index is on track to decline by 0.5%, due to weaker economic data that has increased the likelihood of two quarter-point rate cuts by the Federal Reserve this year.

As a result, traders are anticipating a softer non-farm payrolls report later in the day, with the possibility that job growth may fall below the median forecast of 185,000 by economists.
The Federal Open Market Committee is anticipated to keep rates unchanged at its upcoming meeting next week. However, market expectations currently reflect a 50 basis point reduction in rates by the end of December, with the first cut likely to occur in September.

In a note to clients, Joseph Capurso, head of international economics at Commonwealth Bank of Australia, stated, “Although the non-farm payrolls report is expected to show some weakening, we anticipate an overall message of strength. The U.S. labor market cannot be considered weak, but rather strong, albeit not at its peak. Consequently, the market’s projection for the FOMC’s initial rate cut in September may be delayed, which could result in a modest increase in the value of the USD.”
The euro held steady at $1.0889, following a slight increase of 0.2% in the previous session when the European Central Bank (ECB) initiated its easing cycle by lowering rates by a quarter point. However, the ECB staff also raised their inflation forecasts, indicating that inflation is expected to remain above the central bank’s 2% target until late next year.

Similarly, the British pound remained largely unchanged at $1.2792, not far from its weekly high of $1.2828, which was the strongest level since mid-March.

On the other hand, the US dollar traded slightly stronger against the Japanese yen at 155.85 yen, but was still on track to record a loss of nearly 1% for the week.

The Bank of Japan is also scheduled to announce its policy decision next week, and market consensus suggests a potential reduction in the monetary authority’s monthly government bond purchases.

(Reporting by Kevin Buckland; Editing by Lincoln Feast.)