The U.S. dollar drifted higher on Monday in generally thin trading, with many investors on the sidelines ahead of Friday's U.S. nonfarm payrolls report, which could determine the path of the Federal Reserve's monetary policy.
The U.S. Labor Department is expected to report a gain of 690,000 jobs in June, compared with 559,000 in May, and an unemployment rate of 5.7% versus 5.8% in the previous month, according to a Reuters poll of economists.
The dollar has been on an upside trajectory since the outcome of the U.S. central bank's policy meeting earlier this month, with a majority of Fed policymakers pencilling in at least two quarter-percentage-point interest rate increases by the end of 2023.
"The potential for an upside surprise (in the U.S. jobs data) that pulls monetary tapering and tightening expectations forward is looming ever bigger for investors," said Karl Schamotta, chief market strategist at Cambridge Global Payments (NYSE:GPN) in Toronto.
"A number significantly above the 700,000 mark could really get the dollar freight train running, and no one wants to be tied to the tracks if that happens," he added.
Jane Foley, senior FX strategist at Rabobank in London, said, however, that another weak U.S. employment report for June could fail to diminish talk of inflation risks in the world's largest economy as the market now understands that labor supply has been containing the jobs growth recovery.
"This could mean that the U.S. dollar recovers swiftly on any post-payrolls sell-off, and that on a risk-reward basis it may not pay to be short U.S. dollars into the (data's) release," she added.
Softer-than-expected inflation data last week did little to ease concerns about the Fed dialling down its monetary stimulus, as investors pared back bearish dollar bets.
Speculators decreased their net short dollar positions in the latest week, according to U.S. Commodity Futures Trading Commission data.
Francesco Pesole, FX strategist at ING, said in a research note that there has been "fierce re-pricing" of the Fed's rate expectations, which has lifted the dollar across the board.
He added that the euro and sterling, which saw a reduction in net long positions, have carried the brunt of the Fed's rate outlook.
In afternoon trading, the dollar index was up 0.1% at 91.897.
Investors are also looking at U.S. consumer confidence data on Tuesday as well as the Institute for Supply Management's manufacturing index on Thursday for clues as to where interest rates are headed.
The euro was down 0.1% at $1.1923, while euro-dollar implied volatility gauges with a one-year maturity were close to their lowest since March 2020.
Against the yen, the dollar was down 0.2% at 110.57 <jpy=ebs>.</jpy=ebs>
The Australian dollar, seen as a liquid proxy for risk appetite, fell 0.35% on the day to US$0.7565, while the New Zealand dollar slid 0.4% to US$0.7042.
In cryptocurrencies, bitcoin was down 0.9% at $34,388. It showed little reaction to Britain's financial regulator saying that Binance, one of the world's largest crypto exchanges, cannot conduct any regulated activity, and issuing a warning to consumers about the platform. NEW YORK (Reuters)