The dollar remained pinned lower against the euro and yen after a heavy selloff Thursday, with traders looking ahead to a U.S. nonfarm payrolls report due later in the day that Bank of America Merrill Lynch described as the "most important in years."
The greenback sank rapidly Thursday after the European Central Bank kept interest rates on hold and hinted that it was in no hurry to ease policy further.
Market-watchers have been reasonably confident in recent weeks that the U.S. Federal Reserve is comfortably in the lead as the central bank most likely to reel in easing policies soonest. Traders have pumped the dollar higher in response. But now that there are fresh concerns that the Fed may not be so far ahead of other major central banks, the dollar has fallen sharply. In addition to reaching its lowest point against the euro in three months, the dollar has now dropped to its weakest point against the yen since the Bank of Japan boosted its own easing program in April.
The nonfarm payrolls report is treated as the premier gauge of the health of the U.S. economy and is a key input into the Fed's stance. The result will be the key focus for the rest of the day, and traders showed no appetite for placing large bets in the immediate run-up Friday.
Analysts polled by Dow Jones Newswires expect an increase in jobs of 169,000 in May from a reading of 165,000 in April and an unchanged unemployment rate of 7.5%.
"The bar is quite high. Employment data will support the dollar only above 200,000. On consensus numbers, the dollar will stay vulnerable and will struggle to get much above ¥97 against the yen," says Chris Turner, currencies strategist at ING.
Weak employment data would also likely reduce the pace of the selloff seen in emerging market currencies since the start of the month.
"The worst story for emerging markets would be strong U.S. employment data, which would bring U.S. yields back to a 2.2% level with investors taking profit in Brazil, Mexico, Russia and Poland," Mr. Turner said. Ten-year Treasury bonds currently yield 2.05%. Higher yields are correlated with moves out of emerging-markets debt and bouts of weakness in some emerging-markets currencies.
The Russian ruble extended recent losses against the dollar, trading at 32.425 rubles against the buck, the weakest level for the ruble since September 2012. The currency remains vulnerable to further losses, said Peter Kinsella, a senior currencies strategist at Commerzbank CBK.XE +0.43% . "Things could get worse before they get better," said Mr. Kinsella.
Elsewhere, the decision by Germany's central bank to lower its growth forecast to 0.3% this year from its December estimate of 0.4% expansion wasn't reflected in the markets, which are now focused on the key U.S. employment data ahead. Similarly, data showing a 1.8% monthly rise in Germany's industrial output in April, set against expectations for a reading of 0%, had no impact.
Late in the European morning, the euro was trading at $1.3249, unchanged from the levels it held late in New York Thursday, according to EBS. The dollar was trading at ¥95.75 against the yen, down from ¥97. The pound was trading at $1.5581, slightly down from $1.56.
The Wall Street Journal Dollar Index, which tracks the dollar against a basket of currencies, was at 73.17, down from 73.34.
