By MATTHEW WALTER CONNECT
The dollar declined against the yen as investors considered whether a recent softening of the U.S. labor market will lead the Federal Reserve to make a less dramatic pivot away from its exceptionally loose monetary policy at its upcoming meeting.
Traders mostly overlooked the unexpectedly large drop in U.S. unemployment claims reported Thursday because of one-time issues with the underlying data. Instead, they focused on the Fed's meeting scheduled for next week, when policy makers are widely expected to announce a tapering of the central bank's bond-buying program, which has kept interest rates low and weighed on the dollar.
Given the mixed performance of the U.S. economy lately, including the slightly smaller-than-expected increase in employment in August, many investors now see the Fed announcing a more modest pullback from the bond purchase program than previously thought. Some expect the Fed to adjust its forward guidance to signal that, even as it shrinks its asset-purchase program, it will take other steps to prevent borrowing costs from rising too quickly, said Shahab Jalinoos, a currency strategist at UBS. That has prompted many investors to sell the greenback in recent days.
"The market has started to chew with the idea that maybe the Fed, while still tapering, may also introduce another concept that calms the market," said Mr. Jalinoos said. "As long as there's that discussion, that's something that—for the time being—can weigh on the dollar."
By late afternoon, the dollar was at ¥99.45 compared with ¥99.89 late Wednesday. Against the Swiss franc, the dollar was at CHF0.9307 from CHF0.9305.
The Wall Street Journal Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 73.80 from 73.794 late Wednesday.
Even so, many strategists say the long-term case for a stronger dollar remains intact, as the Fed's movement away from monetary stimulus, whether it occurs over a period of just a few months or a longer period, will ultimately result in a move toward higher rates in the U.S., boosting the appeal of the dollar.
"We expect the Fed to start shifting its policy stance soon, and maintain a bias for a stronger U.S. dollar for the balance of this year," said Nick Bennenbroek, head of currency strategy at Wells Fargo.
The euro traded modestly lower after a report showed that factory output in the euro zone fell sharply in July to its lowest level in more than three years, raising doubts about the currency union's economic recovery.
The euro changed hands at $1.33 from $1.3311 late Wednesday. The common currency was at ¥132.28 from ¥132.96.
In the U.K., Bank of England governor said while the economy is improving, the central bank remains committed to its pledge not to raise its benchmark lending rate until unemployment falls below 7%, as long as inflation remains in check.
The U.K. pound fetched $1.5804 from $1.5818 late Wednesday.
