By Stefano Ribaudo and Kevin Buckland
TOKYO (Reuters) – The dollar fell on Monday but remained close to its highest in nearly two weeks as investors’ focus turned to a U.S. jobs report due later this week.
U.S. payrolls data due on Friday will be crucial after Federal Reserve Chairman Jerome Powell shifted from battling inflation to preparing to protect against job losses.
Analysts say the jobs numbers will determine the size of the Fed’s expected rate cut. Markets have already priced in a 25 basis point rate cut for weeks.
The dollar rose to its highest since Aug. 20, supported by a rise in long-term U.S. Treasury yields to their highest since mid-August, as inflation data pointed to fewer rate cuts and GDP figures suggested the economy was on solid enough footing to give the Federal Reserve room to be less aggressive in easing policy.
Traders now expect a 50 basis point rate cut by the Fed this month at 33%, while a quarter point cut is expected. A week ago, the forecast was 36% for a larger cut.
The dollar index against six major currencies fell 0.10% to 101.65, after hitting 101.79, a level not seen since August 20.
The euro rose to $1.1062, after hitting $1.1043, its lowest level since August 19.
On the political front in Europe, the Alternative for Germany party is projected to become the first far-right party to win a regional election in Germany since World War II, giving it unprecedented power even if other parties are certain to exclude it from power.
“The only clear lessons are that the far-right AfD continues to resist the temptations of power until it secures an absolute majority,” said Christian Schulz, deputy chief European economist at Citigroup.
Some investors have expressed concern that political deadlock in Berlin and also in Paris could prevent Europe from moving forward with integration initiatives they believe are necessary to unleash its growth potential and play a bigger role in world affairs.
Financial markets have cut bets on a European Central Bank rate cut as service sector inflation in August remained steady and ECB policymakers offered no clues on further monetary easing after a widely expected rate cut in September.
They have priced in a 59 basis point rate cut by the end of the year compared with 67 basis points immediately after the release of German inflation data and 70 basis points in mid-August.
Non-farm payrolls
A public holiday in the United States on Monday could lead to a potentially slow start to the week for the dollar, but the following days will see a steady stream of macroeconomic data culminating with Friday’s nonfarm payrolls data, analysts said.
Economists polled by Reuters expect the United States to add 165,000 new jobs in August, up from an increase of 114,000 jobs in the previous month, and for the unemployment rate to fall to 4.2%.
“If the U.S. economy adds 150,000 jobs or more and the unemployment rate falls to 4.2% or below, that would increase confidence that the economy is heading for a soft landing,” said Tony Sycamore, an analyst at IG, adding to expectations of a 25 basis point rate cut this month.
However, Sycamore believes the dollar’s recent strength against currencies like the yen is unlikely to last.
“The pair needs to see a sustained break above the resistance at 152.00 to negate the downside risks,” he added.
Treasuries will not trade on Monday due to a holiday in the United States, but the yield on the 10-year note was at 3.9110% after rising 4.4 basis points on Friday.
The dollar rose about 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 Chairman Jerome Powell sent a strong message that the easing campaign will begin at the next policy meeting.