By Stefano Rebaudo
(Reuters) – The dollar edged lower on Monday but remained within striking distance of its highest in nearly two weeks as investors’ attention shifted to the U.S. jobs report due later this week.
U.S. payrolls due on Friday will be crucial after Federal Reserve Chairman Jerome Powell shifted his focus from fighting inflation to being prepared to ward off job losses.
Analysts expect that the labor market figures will determine the extent of the expected interest rate cut by the US Federal Reserve. The markets have already been pricing in a cut of 25 basis points for weeks.
Earlier, the greenback hit its strongest level since August 20, boosted by a rise in long-term Treasury yields to their highest since mid-August as inflation data pointed to a smaller rate cut.
The US gross domestic product figures also indicate that the economy is on sufficiently solid ground to give the US Federal Reserve room to ease its monetary policy less aggressively.
Traders currently have a 33% chance that the Fed will cut interest rates by 50 basis points this month, with a quarter-percentage-point cut already priced in. A week earlier, expectations for a deeper cut were 36%.
“It’s all about economic numbers these days,” said Athanasios Vamvakidis, global head of foreign exchange strategy at BofA.
“We expect the dollar to weaken in the second half of the year, but the market should not get too excited about it,” he added, setting a target of $1.12 for the euro.
“The U.S. economy is slowing, but it is still doing much better than the rest of the world.”
The dollar index against six major currencies weakened 0.08 percent to 101.67, after reaching a level of 101.79 not seen since August 20.
Last week, it fell to 100.51 for the first time since July 2023 after Fed Chairman Powell sent a clear message that the easing campaign would begin at the upcoming monetary policy meeting.
The euro rose 0.2 percent to $1.1060, after hitting its lowest level since August 19 at $1.1043.
On the European political front, the Alternative for Germany (AfD) was forecast to become the first far-right party to win a state election in Germany since World War II, giving it unprecedented power even as other parties were certain to exclude it from the election.
“The only clear lesson is that the far-right AfD will continue to resist the temptation of power until it gains an absolute majority,” said Christian Schulz, deputy chief economist for Europe at Citi.
Some investors fear that political deadlock in Berlin and Paris could prevent Europe from pushing forward integration initiatives that could boost growth and enable Europe to play a greater role in global politics.
Money markets reduced their bets on interest rate cuts by the European Central Bank as services sector inflation remained sluggish in August and ECB policymakers gave no indication of further monetary easing after the widely expected rate cut in September.
They have priced in 59 basis points of rate cuts by the end of the year – meaning two steps of 25 basis points each and a 36 percent probability of a third cut – compared to 67 basis points immediately after the release of German inflation data last week and 70 basis points in mid-August.
Non-agricultural payrolls
A US holiday on Monday gave the dollar a slow start to the week, analysts said, but there will be a steady stream of macroeconomic data in the days that follow, culminating with the release of non-farm payrolls on Friday.
Economists surveyed by Reuters expect the U.S. economy to grow by 165,000 jobs in August, compared to 114,000 in the previous month.
Analysts said the data was broadly in line with consensus forecasts and consistent with a soft landing and a 25 basis point easing of Fed policy this month.
“Any numbers of 100,000 or below pose the risk of a hard landing and the market is pricing in a higher probability of a 50 basis point rate cut,” said Bank of America’s Vamvakidis.
The dollar rose 0.40 percent to 146.74 yen.
Analysts say it will be difficult to see the dollar rise against the yen given the Fed’s impending rate cut.
Due to the US holiday, Treasury bonds will not be traded on Monday, but the yield on 10-year bonds was at 3.9110 percent after rising 4.4 basis points on Friday.
(Reporting by Stefano Rebaudo and Kevin Buckland; Editing by Shri Navaratnam, Gareth Jones, Hugh Lawson and Andrew Heavens)
