The dollar held near a five-week high against a basket of currencies on Thursday, steadying as investors looked to a string of potentially market-moving events, including the European Central Bank's policy review and US payrolls report. Political instability in Portugal has weighed on the euro, sparking a sharp fall in euro/yen, which in turn lifted the Japanese currency across the board, though the move appears to have run its course for now.
The dollar index edged up slightly to 83.259, having hit a five-week high of 83.717 on Wednesday before investors trimmed back long positions heading into a US holiday on Thursday. The euro stood little changed on the day at $1.3002, after falling as low as $1.2923 at one point on Wednesday, its weakest since late May, hit by jump in Portuguese bond yields.
Portugal's 10-year bond yield shot above 8 percent and its stock market slumped 5 percent on fears a snap election could derail Lisbon's exit next year from a bailout by the European Union and International Monetary Fund. "As long as the crisis is contained within Portugal, the impact on broader markets will be limited. But if there is contagion to Italy and Spain, then there would be big trouble as Germany is unlikely to offer any strong support ahead of its election in September," said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ. Overall, caution ruled given looming central bank meetings in the euro zone and UK and the market so hyper sensitive to the outlook for Federal Reserve policy.
No policy change is expected from the European Central Bank later on Thursday but a jump in yields in Portugal, and other periphery markets, should keep President Mario Draghi sounding dovish. "Draghi is likely to emphasise that the growth outlook is still subject to downside risk, that the ECB is ready to act and that there are still tools in the toolbox," said J.P. Morgan analyst Greg Fuzesi in a note.
"Draghi will also say that the exit from the current policy stance is "very far away", "very distant" or some variant of this." The Bank of England also has its first meeting under new Governor Mark Carney, who took over just this week. There has been some speculation he would break with convention and release a statement even if the bank takes no action.
Over the last sixteen years the report has come in under expectations 75 percent of the time with an average miss of 70,000. In addition, four of the last five June releases have fallen short of expectations. Forecasts for employment range from 125,000 to as high as 220,000, with a median at 165,000. The jobless rate is expected to fall to 7.5 percent from 7.6 percent in May.
The dollar also eased slightly against the yen, which benefited as investors sought shelter in the safe-haven Japanese currency overnight from concerns in Europe. Also helping the yen were events in Egypt, which are making some investors risk-averse, as armed forces overthrew President Mohamed Morsi. The dollar fetched 99.85 yen, almost unchanged from late US levels and about a full yen below five-week high of 100.86 yen hit on Wednesday. The Aussie rose 0.4 percent to $0.9121, rebounding from a fresh three-year trough of $0.9036 carved out the previous day on speculation that interest rates could be cut next month.
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