Dollar sinks to one-month low before payrolls test

The dollar sank to its lowest in almost a month against major rivals on Friday, ahead of a crucial U.S. jobs report that could spur the Federal Reserve to an earlier tapering of stimulus.

The dollar index, which measures the greenback against six peers, was little changed at 92.207 after earlier touching 92.151 for the first time since Aug. 5.

The euro was also mostly flat at $1.1878, after hitting the highest since Aug. 4 at $1.1884,

supported by regional inflation at a decade high and hawkish rhetoric from European Central Bank officials ahead of a policy meeting on Sept. 9.

"The market is seemingly running a progressive short USD position into today's non-farm payrolls," Chris Weston, head of research at broker Pepperstone in Melbourne, wrote in a client note.

The rally toward $1.19 "is not just a USD move, but a play on next week’s ECB meeting, with some talk the central bank could signal a slower pace of asset purchases," he wrote.

Meanwhile, the U.S. central bank has made a labour market recovery a condition for paring pandemic-era asset purchases.

The dollar had been strengthening for most of last month on the view that a taper could be imminent, even as COVID-19 cases spiked in the United States, which paradoxically gave the currency an additional boost because of its role as a safe haven.

But the dollar index retreated after hitting a 9-1/2-month high of 93.734 on Aug. 20 as Fed officials began suggesting the virus' spread could delay policy tightening.

Chair Jerome Powell said at the Fed's Jackson Hole symposium a week ago that a taper was still possible this year, but there was no hurry to subsequently raise interest rates, sending the dollar down further.

Monthly non-farm payrolls, due later Friday, are expected to rise by 750,000, with the unemployment rate falling to 5.2% from 5.4%, according to a Reuters poll of economists. However, estimates range widely, from as little as 375,000 to over a million.

Signals from the economy ahead of the report have been mixed. Overnight, data showed layoffs dropped to their lowest in more than 24 years. However, the ADP National Employment Report on Wednesday was much weaker than economists expected.

Commonwealth Bank of Australia (OTC:CMWAY) forecasts the United States added 800,000 jobs last month, which it says would be enough to spur the Fed to taper, although the bar for an announcement at this month's meeting has been raised by the current outbreak.

"The risk is uncertainty associated with the virus stands in the way of an imminent taper announcement," which would reverse any dollar gains from a strong payrolls report, CBA strategists wrote in a report.

The Australian dollar rose 0.18% to $0.7416 after earlier touching a one-month high $0.7417.

The New Zealand dollar gained 0.22% to $0.7127 after rising to the highest since June 16 at $0.7129.

The greenback added 0.07% to 110.01 yen, holding near the centre of its trading range since early July and showing little reaction to Prime Minister Yoshihide Suga's decision to step down at the end of the month.