SINGAPORE/LONDON (Reuters) -The dollar rose on Friday, heading for its steepest weekly rise since May as traders scaled back expectations of early interest rate cuts this year ahead of U.S. payrolls data later in the day.
The U.S. currency’s strong start has cast a shadow on the euro ahead of euro zone inflation data at 1000 GMT, and on Japanese yen, each down around 0.3% against the dollar.
The dollar’s rebound will be tested by the nonfarm payrolls report due later in the day. Economists polled by Reuters forecast that 170,000 jobs were created in December, fewer than the 199,000 in November.
Federal Reserve officials in December predicted 75 bps of rate cuts in 2024. Money market, instead, expected around double that amount, with the optimism spurring a year-end blistering rally in stocks and bonds.
But since the start of the year, markets have dialled back their expectations. Traders are now pricing in less than 140 basis points of cuts this year, with the chance of a cut in March at 62%, down from 86% a week earlier, CME FedWatch tool showed.
Moh Siong Sim, currency strategist at Bank of Singapore said the data this week has shown that the U.S. labour market seems to be holding up and “perhaps the Fed will still need to stress the message of keeping the rates a bit longer than what the market has already priced in.”
“But we’ll see, because tonight’s payroll data will be a key data to watch.”
Supporting the dollar, data showed on Thursday that U.S. private employers hired more workers than expected in December, pointing to persistent strength in the labour market that should continue to sustain the economy.
The dollar last rose 0.24% against a basket of currencies to 102.68, after touching a fresh three week high. The index is up 1.3% for the week, its strongest performance since the week ending May 15.
The euro is on track for 1.1% decline in the week, in its sharpest weekly drop since early May and snapping a run of three weeks of increases.
The euro zone inflation data release “will be one to look out for in terms of the potential for any European Central Bank rate cuts,” said Jim Reid, strategist at Deutsche Bank.
Following French and German inflation data on Thursday, Deutsche Bank’s European economists see the euro-area numbers in line with consensus at 3% for headline and 3.4% for core inflation.
Elsewhere, the yen, which is highly sensitive to U.S. yields, weakened 0.3% to 145.07 per dollar, after touching a more than three-week low earlier in the session.
The 10-year U.S. Treasury yield broke through the psychological 4% mark and was last at 4.01%. [US/]
Investors have tempered their expectations of the Bank of Japan exiting its ultra-loose monetary policy in the near term, with concerns over the earthquake that hit western Japan earlier this week casting further doubts on a policy shift.
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