LONDON—The dollar retreated on Friday, ahead of a key employment report later that could offer a litmus test of the strength of the U.S. economic recovery, but with the Federal Reserve’s commitment to fighting inflation, strategists believe any weakness won’t last.
The euro and the pound pared overnight losses and rose for the first time in three trading sessions, while the Japanese yen clawed back from another break through the key 145 level against the dollar.
Overnight, a number of Fed officials reinforced the view that the central bank is nowhere near finished with raising rates as it seeks to tame inflation, and rates are expected to go up further.
The September non-farm payrolls report comes hot on the heels of a measure of private-sector hiring that beat expectations and an indicator of vacancies that showed an unexpected decline, offering a mixed picture of the jobs market.
Consumer inflation data is due next week and could prove equally influential in setting investors’ expectations for the Fed, according to CIBC head of G10 currency strategy Jeremy Stretch.
“We’re going into a ‘double-header’ next week,” he said.
“Until we see what is effectively almost empirical evidence that either the labour market is materially easing or inflationary pressures are dissipating, dollar dips are going to remain bought into,” he said.
The euro was last up 0.1 percent on the day at $0.9801, having tried twice unsuccessfully to regain parity this week.
Sterling rose 0.3 percent to $1.1192, having fallen 1.4 percent overnight. It rose to as much as $1.1493 earlier this week, after the British government reversed a planned cut to the highest rate of income tax.
The U.S. dollar index eased 0.1 percent to 112.11, after rising nearly 1 percent overnight, and was set for a decline of 0.16 percent this week.
All eyes now turn to the U.S. non-farm payrolls report due at 1230 GMT. Economists expect 250,000 jobs to have been added last month, compared with 315,000 in August.
“With the Fed seeing evidence of success, we should not expect a shift in rhetoric, no matter what the NFP print is today. That in our view means the US dollar will remain under upward pressure,” MUFG head of research Derek Halpenny said in a note.
“Any US dollar weakness on a weak NFP print that fuels easing expectations next year is, in our view, unlikely to last.”
The yen was last up 0.2 percent against the dollar at 144.91 per dollar, close to a 24-year low of 145.90 hit last month that prompted an intervention by Japanese authorities to shore up the fragile currency.
In another sign that major central banks’ fight against inflation is far from over, accounts from the European Central Bank’s September meeting show policymakers appeared increasingly worried that high inflation could become entrenched, making aggressive policy tightening necessary even at the cost of weaker growth.
