The dollar headed for its sharpest weekly drop of the year on Friday as Federal Reserve Chair Jerome Powell sounded more confident about cutting interest rates in coming months, while the yen gained on mounting speculation of a rate rise in Japan.
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The dollar index was set for its sharpest weekly drop since mid-December on Friday ahead of U.S. payrolls data, as Federal Reserve Chair Jerome Powell sounded more confident about cutting interest rates in coming months.
Powell said the Fed was “not far” from the confidence it needed to cut rates. Currencies typically weaken if central banks cut interest rates.
The dollar index edged 0.08% higher to 102.84 at 0917 GMT, but it was still heading to its sharpest one-week decline since mid-December, down around 1% this week against a basket of six peers.
The key data on Friday is U.S. job report that could confirm or confound market expectations for a U.S. cut by June.
Economists expect the U.S. to have added a solid 200,000 jobs after January’s blowout 353,000.
“A report this Friday in line with the 200k consensus for the nonfarm payrolls increase would certainly keep the Fed in its holding pattern,” said Padhraic Garvey, Regional Head of Research at ING.
“It (the data) will be instrumental in determining the direction of markets ahead, but it appears that rates markets have been setting themselves up for a much weaker figure.”
Weakening the euro against the dollar, there were signs that the European Central Bank’s (ECB) governing council had begun to discuss a suitable timeline for monetary policy easing.
The ECB kept rates at record highs of 4.00% on Thursday while cautiously laying the ground to lower them later this year, saying it had made good progress in bringing down inflation.
On Friday, ECB policymaker Francois Villeroy de Galhau said there was a strong consensus at the central bank that interest rates would be lowered this spring, adding that “spring is from April until June 21”.
Another policymaker Olli Rehn said that the risk of the ECB rushing into a rate cut too early had eased.
The common currency fell 0.18% to $1.0929 after hitting an almost two-month high of $1.0956 during Asia trading hours, putting it back in the middle of a range it has kept for a year. It is up around 0.9% against the dollar for the week.
The euro has gained this week because the Fed funds rate is at 5.25%-5.5% and investors see the U.S. as having more room to cut.
Elsewhere, the yen rose 0.29% against the dollar to 147.64 yen, after touching its highest level in over a month. It is up 1.6% on the week, its strongest weekly percentage rise since December as policymakers have noted signs of positive wage-price cycle sustaining inflation – setting the stage for Japan’s first interest rate increase in 17 years.
