The dollar edged lower against the euro and the yen in tight trade on Friday ahead of U.S. jobs data, but dealers said the U.S. currency had not strayed from its recent rebound.
Traders said the dollar's recovery since the start of the new year after months of relentless selling on concerns about the U.S. budget and current account deficits was still dictated by the adjusting of positions and not due to real demand.
"With the market currently driven by speculators reducing risk exposure and given no fresh news, it's difficult to find incentives to renew dollar selling," said Kikuko Takeda, manager of currency research at the Bank of Tokyo-Mitsubishi.
"I expect the market to lack a clear direction for the time being."
She said the market could stay in ranges until later this month, ahead of key financial events including a meeting of the Group of Seven finance ministers and a policy-setting meeting of the U.S. Federal Reserve, both slated for early February.
Some speculators were almost done with short-covering on the dollar while others still hadn't caught up, giving further scope for the currency to rise on the closing of the short positions, traders said.
There was also some demand from Japanese institutions ahead of a three-day weekend in Japan, traders said.
At 10:20 p.m. EST, the euro fetched around $1.3190, compared with 1.3172 in late U.S. trade. On Thursday, the euro fell below $1.32 for the first time in nearly a month.
The dollar was at 104.80 yen versus 105.01 in late trade in New York, where it rose as far as a three-week high of 105.19, a level where some speculators were seen completing their unwinding of dollar short positions.
The euro traded at 138.25 yen, compared with 138.32.
The U.S. currency was top-heavy above 105 yen where offers from Japanese exporters were lined up, but that level, if sustainable, could attract fresh buying from Japanese institutional investors, traders said.
The dollar was seen supported around 104.70 yen ahead of the December non-farm payroll figures due later in the day.
JOBS DATA EFFECT
The dollar showed only a moderate reaction overnight to an unexpected surge in last week's U.S. initial claims for unemployment benefits.
Some traders said the reaction was an indication of improved sentiment for the dollar, and the currency could digest somewhat negative news, such as a weaker reading for the payroll data.
Kaoru Kondo, chief currency analyst at Fisco, said he didn't expect the closely watched payroll figures to prompt the market to chart a new direction, as the Fed's policy of raising interest rates was intact -- acting as a support for the dollar.
"The Fed still considers short-term rates to be accommodative and so long as the Fed's policy of moderate rate increases stays the same, the currency market may not be affected much by swings in the jobs data," Kondo said.
Economists forecast that 175,000 new jobs were generated last month. Views were divided as to how the dollar would react if the reading came in around 100,000 to 150,000.
There was some expectations that the U.S. economic growth scenario and interest rate differentials could take center stage again and lend support to the dollar.
The Fed is widely expected to raise short-term rates by 25 basis points to 2.50 percent at its February meeting.