Dollar Rules as Investors Brace for Jobs Data Clues on Fed Rates

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A gauge of the dollar was set for a weekly gain before a U.S. Labor Department report on Friday that may bolster speculation the Federal Reserve will raise interest rates as soon as next month.

The Bloomberg Dollar Spot Index was about 0.4 percent from its highest level in more than four months touched Thursday when a report showed filings for U.S. unemployment benefits hovered near the lowest in four decades. Economists surveyed by Bloomberg forecast nonfarm payrolls increased by more than 200,000 for a third month in July. Australia’s dollar advanced after its central bank indicated unemployment had peaked.

“It looks like we are heading toward above 200,000 on the payrolls number,” said Stuart Bennett, London-based head of Group-of-10 currency strategy at Banco Santander SA. This “would probably be enough to keep everyone happy with the view that the Fed is still heading to a rate hike sooner rather than later. On the whole, it will be dollar supportive.”

Bennett said his bank is forecasting a September rate increase.

The Bloomberg index that tracks the dollar against major peers was little changed at 1,214.90 as of 7:13 a.m. New York time. It has climbed 0.5 percent this week and touched 1,219.39 on Thursday, the highest since March 16. The euro was little changed at $1.0929, while the yen was at 124.68 per dollar.

Wage Focus

Friday’s labor market report will show employers took on 225,000 workers last month, the jobless rate held at a seven-year low of 5.3 percent, and average hourly earnings increased 2.3 percent in the 12 months through July, Bloomberg surveys of economists show.

Banco Santander’s Bennett said wage data was key. If the reading were around the consensus figure of 2.3 percent “it still might imply the dollar doesn’t get sold off aggressively, even if payroll underperforms expectations,” he said.

Traders priced in a 48 percent probability that the Fed will raise borrowing costs in September, based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase. The probability stood at about 42 percent a week ago.

Last month Fed Chair Janet Yellen said she expected the central bank to raise its benchmark rate this year, while emphasizing the pace of tightening will probably be gradual.

Easing Ends?

The Aussie climbed 0.5 percent to 73.84 U.S. cents after the Reserve Bank of Australia said in its quarterly update of economic growth and inflation forecasts that the “unemployment rate is now forecast to remain little changed over the next 18 months or so.” The currency is the best performer among the greenback’s 16 major peers this week with a 1 percent gain.

“It would signal that the RBA’s easing cycle is finished, because there’s no need for them to keep cutting rates if unemployment isn’t going up,” said Richard Grace, chief currency and rates strategist and head of international economics at Commonwealth Bank of Australia in Sydney.

“In the short term, this could be enough to see the Australian dollar lift up toward 75 cents over the next week or so,” although that could be scuppered by a strong U.S. payrolls report, he said.

Pressure to further stimulate the economy has been relieved by a better labor market and a weaker currency, allowing RBA Governor Glenn Stevens in his policy decision on Aug. 4 to omit a reference to the local dollar being too high for the first time in 18 months. The central bank has kept interest rates at a record-low 2 percent since May.

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