LONDON (MarketWatch) -- Expectations for a large drop in U.S. October non-farm payrolls data Friday put economic figures back in focus for currency markets, contributing to a weaker tone for the U.S. dollar.
"With little else to focus on in the very near term, investors will return their focus onto economic data and today's [U.S. employment report] will likely remind investors that the worst in terms of data is still ahead of us," said Luca Cazzulani, a strategist with UniCredit MIB in Milan.
"This factor should be bond-positive and negative for risky assets," Cazzulani said.
Risk appetite is likely to continue calling the tune in equity markets, which will in turn provide cues for foreign-exchange markets, agreed strategists at Lloyds TSB.
The U.S. labor data "is likely to be negative for stocks today and this will ... in all likelihood be expressed through a stronger yen," they wrote.
A MarketWatch survey of economists found median expectations for a loss of 210,000 nonfarm payroll jobs in October, the most since March 2003. The report will be released at 8:30 a.m. Eastern. See full story.
The dollar index , a measure of the greenback against a trade-weighted basket of six major currencies, traded at 85.507, down from 86.280 in late North American activity Thursday.
The euro rose to $1.2793, up from $1.2677. The pound rebounded to $1.5784 against the dollar from $1.5530.
The pound and the euro sank Thursday after the Bank of England and the European Central Bank cut interest rates. The BOE Monetary Policy Committee slashing its benchmark by an unexpected and unprecedented 1.5 percentage points to 3%. See full story.
The ECB dropped its key rate by a half point to 3.25%.
The dollar was buying 97.31 yen, down slightly from 97.43 late Thursday versus the Japanese currency. The euro rose slightly to 124.51 yen from 124.22.
The yen was the ultimate beneficiary of financial turmoil and surging risk aversion, soaring in October as investors stampeded out of once-popular carry trades. Such strategies are based on borrowing in low-yielding currencies, such as the yen, and using the proceeds to buy assets denominated in higher-yielding currencies.
The dollar has also been a beneficiary of rising risk aversion. Massive global de-leveraging and repatriation of dollars from overseas and safe-haven flows served to boost the greenback in October.
Since the start of the month, a modest return of risk appetite had seen the yen and dollar retreat slightly from October's big gains.
But with equity markets falling Wednesday and Thursday, the sustainability of the risk-appetite revival appears questionable, analysts said.
In particular, the weak finish by U.K. and European equities in the wake of rate cuts by the Bank of England, the ECB and other European central banks "suggests that higher-yielding and emerging market currencies along with the euro and sterling are now vulnerable to renewed declines against the U.S. dollar," wrote strategists at BNP Paribas.
The British pound initially strengthened against the euro Thursday, despite the fact that the U.K. Monetary Policy Committee's massive rate cut dropped the benchmark below the ECB's key rate for the first time in the euro's nearly decade-long existence.
But the euro eventually rebounded later Thursday. It lost ground against sterling Friday morning to trade at 81.12 pence, but remains near its all-time high.
Traders said sterling's temporary outperformance versus the euro Thursday reflected notions that the Bank of England is likely to remain aggressive in the face of a sharp economic slowdown, while the ECB was criticized for falling behind the curve.
But the aggressive BOE move has also heightened concerns about Britain's economic outlook, the BNP Paribas strategists noted.
"Indeed, there is concern that the U.K. outlook must be far worse than previously assumed for the BOE to take such aggressive action," they wrote.
