Dollar holds gains as US manufacturing picks up, jobs data awaited

LONDON: The dollar clung to minor gains on Wednesday, edging up from near a five-month trough versus major peers, as a pickup in US manufacturing kept bets alive for a quicker normalisation of Federal Reserve policy.

The dollar index, which measures the greenback against six rivals, hovered just below 90 after dipping to as low as 89.662 on Tuesday and approaching the lowest since Jan. 7 at 89.533.

The euro traded at $1.22 after pulling back from near a multi-month top overnight, when it climbed to $1.22545.

Investors were also eyeing the trajectory of China's recently bullish yuan. It was little changed at 6.3823 per dollar in offshore trading, after retreating from a three-year high of 6.3526 on Monday as policymakers took steps to cool its advance including raising banks' FX reserve requirements.

Sterling remained lower at $1.4135 after easing off a three-year high of $1.4250 reached on Tuesday, while the Canadian dollar traded at C$1.20675 per greenback after rallying to a fresh six-year peak of C$1.2007 overnight as oil prices rose.

"The FX market seems caught between two conflicting drivers," said Valentin Marinov, head of G10 FX research at Credit Agricole. "On the one hand, we have huge amounts of dollar liquidity in the global money markets courtesy of the Fed's QE and the US Treasury's unwinding of the cash holdings under its general account (TGA).

"We think that the times of generous dollar liquidity supply maybe soon drawing to an end, however, and we believe that the dollar could soon benefit from a recovery in the US money market rates and even US Treasury yields."

As the negative impact of the oversupply of dollar liquidity starts fading in coming weeks, the positive dollar impact from the rapid improvement in US fundamentals could intensify, Marinov added.

On Tuesday, the Institute for Supply Management (ISM) said its index of US manufacturing activity rose in May as pent-up demand amid a reopening economy boosted orders.

The dollar initially traded lower on the report, in which ISM said manufacturing's growth potential continued to be hampered by worker absenteeism and temporary shutdowns because of shortages of parts and labour.

Those employment shortcomings will be front and centre of investors' minds on Friday with the release of nonfarm payroll numbers for May, after April's much weaker than expected reading sent the dollar index slumping 0.7% on May 7.

The index was mostly flat from Tuesday at 89.919, but still well off Friday's high of 90.447, when a measure of US inflation closely watched by the Fed posted its biggest annual rise since 1992.

"I don't think inflation will last long term," said Minori Uchida, chief currency analyst at MUFG Bank, who predicts no rate hikes until after 2024. "I think the dollar will ease toward the end of this year."

Elsewhere in currencies, the Australian and New Zealand dollars fell, down 0.4% and 0.5% respectively against the greenback.

The New Zealand dollar traded at $0.7216 against the US dollar and the Aussie was last at $0.7724.

Cryptocurrency Bitcoin traded 1% higher, just above the $37,000 mark, while Ether traded 1.5% higher at $2675.71.