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Dollar Weakens; Monthly Payrolls Data Eyed

The dollar weakened in early European trade Tuesday, slipping to multi-month lows against many of its peers, as traders look to the release of closely-watched nonfarm payrolls data later in the week for clues surrounding the Federal Reserve’s policy thinking.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.2% at 89.820, falling back below 90 from as high as 90.447 on Friday, when the Fed’s favorite measure of U.S. inflation posted a sharper rise than expected.

EUR/USD traded largely flat at 1.2224, not far from a near five-month high of 1.2266 touched last week, while USD/JPY fell 0.1% to 109.50, after climbing as high as 110.20 on Friday.

The greenback received some support Friday when core consumer prices as measured by the personal consumption expenditures price index, a measure closely watched by the Federal Reserve, rose 3.1% from a year earlier. This was above expectations of a rise of 2.9% year-on-year in April, way above the Fed’s nominal target of 2%.

However, this help was minor, despite the hot inflation reading, as government bond yields were mostly lower heading into the Memorial Day weekend.

Fed officials have repeatedly stated that they expect price pressures to be transitory and monetary stimulus to stay in place for some time, especially as the labor market, while improving, remains far below the levels of employment seen before the start of the pandemic.

Vice Chair Randal Quarles and Governor Lael Brainard will both be speaking at separate events later Tuesday, but it’s the nonfarm payrolls numbers on Friday which will attract the most attention this week, especially after the much-weaker-than-expected reading a month ago.

“Our team expects a slightly lower than consensus increase at +500k (consensus around 650k) as labor supply fails to keep pace with increasing demand,” said analysts at ING, in a research note.

“These kinds of lower-than-consensus numbers could be the story for the next two to four months and could continue to take the sting out of the Fed tapering debate.”

Elsewhere, GBP/USD rose 0.2% to 1.4232, after earlier rising as high as 1.4247, breaching a February peak to reach the strongest since April 2018, continuing to benefit from the U.K.’s advanced pace of vaccination which suggests a quick move towards normalisation, and potentially policy tightening.

USD/CAD fell 0.1% to 1.2050, near a six-year low, as the market also begins to expect the Bank of Canada to be one of the first western central bank’s to be tightening its monetary policies.

AUD/USD was up 0.1% at 0.7743, with this risk-sensitive currency gaining even as the Reserve Bank of Australia kept the cash rate and three-year yield target at 0.10% earlier Tuesday, as expected.

The central bank said it will make a decision in July on whether to extend the yield target and undertake further quantitative easing, with a weeklong shutdown in the nation’s second-largest city, Melbourne, adding a layer of uncertainty to the outlook.

USD/CNY rose 0.1% to 6.3731, with the Chinese yuan retreating from Monday’s three-year high of 6.3526, after banks in China were forced by the People's Bank of China to hold more foreign currencies in reserve for the first time in more than a decade in order to stem the surge in the Chinese currency.

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