The dollar started the week on the frontfoot as last Friday's US jobs report for January reinforced expectations of further interest rate hikes from the US Federal Reserve in the coming months.
Though the headline 193,000 increase in payrolls during January came in below expectations of a 250,000 improvement, upward revisions to previous months' data took it towards the more optimistic forecasts. Also dampening the initial dollar-negative reaction was the news that the US unemployment rate fell to a five-year low of 4.7 pct in January and a 0.4 pct increase in hourly wages, ahead of forecasts of a 0.3 pct gain.
The market read the data as suggesting that the US labour market is strong enough to warrant at least one more Fed rate hike, in contrast to expectations last month that the central bank was about to end its policy of raising rates just as new chairman Ben Bernanke takes the helm. Because of this re-evaluation of the US rate outlook, the dollar garnered renewed support from yield factors and the euro fell to 1.1969 usd, its lowest level since Jan 3. "The dollar has derived support from the employment report on Friday that confirmed earlier employment data indicating that the US labour market is strengthening," said Derek Halpenny, economist at The Bank of Tokyo-Mitsubishi.
Bar US trade data on Friday, there's little on the economic calendar to prompt a renewed break out from current levels, analysts said. "While we expect a widening in the trade deficit, it seems unlikely to shift the dollar out its current range until Bernanke's testimony later this month," said Mansoor Mohi-uddin, currency strategist at UBS. In the last few months, the euro has rallied against the dollar on a growing market view that the yield-supporting factors that helped the US currency rally in 2005 may have run their course, with the European Central Bank poised for another hike and the Fed seemingly about to pause. The ECB's president Jean-Claude Trichet all but confirmed last week that the bank will raise rates another quarter point in March. The ECB raised its key refi rate in December to 2.25 pct, its first hike in over five years. Elsewhere, the pound was steady against the euro despite weekend press talk of a weak retail survey from the British Retail Consortium tomorrow.
"If this is confirmed, it will reinforce our suspicion that the December performance was inflated by many consumers opening their wallets to treat their families and themselves at Christmas having held back their spending over much of 2005," said Howard Archer, chief UK economist at Global Insight.
Even if the survey comes in weaker than anticipated, the Bank of England is still expected to keep borrowing costs unchanged at its meeting on Thursday. "Even a very weak BRC survey would be most unlikely to be sufficient to encourage at least four other members of the MPC to join Steve Nickell in voting for an interest rate cut on Thursday," said Archer.