Dollar drops ahead of crucial payrolls data

© Reuters. FILE PHOTO: Woman holds U.S. dollar banknotes in this illustration taken May 30, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Tom Westbrook

SINGAPORE (Reuters) -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.

Traders were on edge and Asia moves small while waiting for U.S. employment data later in the day that could confirm or confound market expectations for a U.S. cut by June.

Powell said the Fed was “not far” from the confidence it needed to cut rates.

On Thursday the European Central Bank left its benchmark rate steady at 4% and laid groundwork for a cut in June. The euro rose, however, because the Fed funds rate is at 5.25%-5.5% and investors see the United States as having more room to cut.

The common currency hit an almost two-month high of $1.0956 during the Asia session – putting it back in the middle of a range it has kept for a year. It is up nearly 1% against the dollar for the week.

The yen is up 1.5% on the week, its strongest 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.

The yen was above its 50-day moving average and at its strongest in a month at 147.54 in early Asia trade on Friday.

“There has been a pull forward of rate hike expectations for Japan,” HSBC analysts said in a note to clients. “Considering that short yen speculative positions are now at extreme levels, then the yen can probably avoid a ‘buy the rumour, sell the fact’ situation when the BOJ does hike, and dollar/yen can still fall further.”

The dollar’s weakness this week also set the Australian and New Zealand dollars 1.5% and 1.1% higher on the week respectively. Sterling is up 1.2% this week to a 2024-high of $1.2820.

The Aussie is at its highest since mid January at $0.6631 and the kiwi at a week high of $0.6183.

Cleveland Fed President Loretta Mester added to cut expectations after saying on CNBC that a couple more inflation reports could give confidence on inflation. They will have two before May and three by the June Fed meeting.

“The dollar now looks more vulnerable into Friday’s (non-farm payrolls data),” said Westpac strategist Imre Speizer. “Unless the U.S. employment report can pull a large dollar supportive rabbit from the hat, dollar weakness could continue next week.”

Economists expect the U.S. added a solid 200,000 jobs after January’s blowout 353,000.