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Dollar stays soft after jump in US jobless claims; Fed in focus

The dollar on Friday held near the previous day's two-week low against a basket of peers after a spike in weekly jobless claims raised hopes that a peak in U.S. rates was near, while the focus turned to the upcoming week packed with central bank meetings.

The number of Americans filing new claims for unemployment benefits surged to the highest in more than 1-1/2 years last week, data on Thursday showed, though layoffs are probably not accelerating as the data covered the Memorial Day holiday, which could have injected some volatility.

Nonetheless, that was enough to knock the U.S. dollar to a more than two-week low against a basket of currencies DXY in the previous session, as investors took the data as a sign that the U.S. labour market was slowing.

The dollar index last stood at 103.42, having lost more than 0.7% in the previous session, its largest daily decline since mid-March.

The index, which measures the U.S. currency against six major peers, is down 0.6% for the week, set for its biggest weekly fall also since mid-March when fears about the health of the banking sector roiled markets.

The euro was flat on the day at $1.07735 EURUSD having gained 0.78% on Thursday to a two-week intraday high due to the dollar sell off. Sterling, which jumped nearly 1% on Thursday, was at $1.2545 just off a near one-month high. GBPUSD

The dollar rebounded against the Japanese yen however, rising 0.48% to 139.6 after Bank of Japan Governor Kazuo Ueda reiterated the central bank's resolve to keep monetary policy ultra-loose. USDJPY

Markets are now turning their attention to the coming week which will see the Federal Reserve, the European Central Bank (ECB) and the Bank of Japan (BOJ) announce interest rate decisions following their respective policy meetings.

The Fed takes centre stage, with money markets leaning toward a pause, though they have priced in a 25% chance that the U.S. central bank delivers a 25 bps rate hike. (FEDWATCH)

"Before the meetings that we had this week I would have said I was expecting the status quo, now I'm not excluding something surprising, because a central bank like Canada, that had clearly telegraphed it was on hold, raised rates and said it was concerned about inflation," said Chester Ntonifor, FX strategist at investment provider BCA.

The Bank of Canada on Wednesday lifted rates after a four-month pause because of surprisingly strong household spending and high core inflation.

"For me, it's clear that the ECB is going to stay hawkish, I don't think they're going to be more hawkish than what's already priced in by markets, what is interesting is the Fed," Ntonifor said.

Ntonifor added that the message markets took concerning the possibility of U.S. rate cuts later in the year would be important for currencies.

The Canadian dollar USDCAD was last at C$1.334 per dollar, not far from the C$1.3321 hit on Wednesday, its strongest in a month after the central bank's move.

The Turkish lira USDTRY tumbled more than 1% against the dollar to a record low after President Tayyip Erdogan appointed Hafize Gaye Erkan, a finance executive in the United States, to head Turkey's central bank.

"A return to policy orthodoxy seems inevitable given the materially diminished foreign exchange reserves and 40% inflation," said Mohammed Elmi, senior portfolio manager for emerging markets fixed income at Federated Hermes.


Chris

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