The dollar dipped on Thursday after data showed U.S. jobless claims rose more than expected last week, raising hopes that a softening labor market will reduce the likelihood of the Federal Reserve reaccelerating the pace of its rate hikes.
Initial claims for state unemployment benefits rose 21,000 to a seasonally adjusted 211,000 for the week ended March 4. Economists polled by Reuters had forecast 195,000 claims for the latest week.
It comes before Friday’s highly anticipated jobs report for February, which may determine whether the Fed increases its pace of rate hikes to 50 basis points at its March 21-22 meeting.
“A lot of traders are breathing a sigh of relief that we’re starting to see some softness in the labor market,” said Edward Moya, senior market analyst at OANDA in New York. “The fear is that if we get a strong payrolls report tomorrow that that’s just going to cement the rising expectations of a half point rate increase.”
The dollar was last down 0.31% against a basket of currencies at 105.28. It is down from a three-month high of 105.88 on Wednesday. The euro gained 0.31% to $1.0577 and is up from a two-month low of $1.0524 on Wednesday.
Fed Chair Jerome Powell on Wednesday reaffirmed his testimony before Congress from Tuesday of higher and potentially faster interest rate hikes, but emphasized that debate was still underway, with a decision hinging on data to be issued before the March meeting.
Fed funds futures traders are now pricing in a 60% probability that the Fed will hike rates by 50 basis points, up from around 22% before Powell’s comments on Tuesday.
Friday’s data is expected to show employers added 205,000 jobs in February, according to a Reuters poll of economists, well below the much-larger-than-expected 517,000 gains in January. Wages are expected to have increased 0.3% for the month, and 4.7% on an annual basis. (USNFAR=ECI), (USAVGE=ECI), (USAVHE=ECI)
Consumer price inflation data on Tuesday will also be key to the Fed’s decision. It is expected to show that prices rose 0.4% in February. (USCPI=ECI)
If the jobs market remains strong and inflation stays high, Treasury yields could face further increases, which would also boost the greenback.
“The Fed’s going to stay data dependent and that’s going to keep us vulnerable to some further pressure in the bond market, which could make the king dollar trade hang around a little bit longer,” said Moya.
The yen gained a day before the Bank of Japan concludes its final meeting with governor Haruhiko Kuroda.
The Japanese central bank is expected to end its long-term yield control policy this year, but make no major changes this week, according to a Reuters poll of economists.
The dollar fell 0.87% against the Japanese currency to 136.216 yen. It reached a three-month high of 137.90 on Wednesday.
Sterling was one of the best performers on Thursday, rising 0.58% to $1.1911. It fell to a more than three-month low of $1.18050 on Wednesday.
