The dollar was little changed on a trade-weighted basis on Friday ahead of US employment figures that could set the tone for the greenback - and other financial markets - for the rest of the month. Trading ranges across major currency pairs were tight in Europe, with investors reluctant to put on big positions ahead of the August non-farm payrolls data.
The euro recovered some of its losses the previous day triggered by comments from European Central Bank President Jean-Claude Trichet suggesting the outlook for growth, inflation and credit conditions will keep policy and therefore market interest rates low for some time.
And the dollar inched back up from its seven-week low against the yen struck earlier this week, supported by gains in European equity markets, US stock futures and two-year US Treasury bond yields. "There's been a degree of recovery in risk appetite ... and there's been a very strong interest from (Japanese) importers to buy dollars at these low levels," said Derek Halpenny, senior currency economist at BTM-UFJ in London, referring to dollar/yen.
The focus is firmly on the US dollar and how it reacts to the US jobs figures. A weaker-than-expected report may trigger dollar selling or alternatively burnish the currency's safe-haven status in a climate of rising risk aversion. "The episode will be critical in judging the extent to which the expected regime switch, from risk cycle to business cycle trading, is proceeding. We expect the dollar to strengthen once market focus shifts to the likely outperformance of the US economy," Citigroup strategists said in a note on Friday.
At 1113 GMT, the dollar index was little changed on the day at 78.36. The dollar was up 0.2 percent against the yen at 92.80 yen, rebounding further from Thursday's seven-week low just under 92.00 yen, and the euro was up 0.3 percent at 132.45 yen.
But it fell nearly 1 percent on the day against the Canadian dollar, which rallied as high as C$1.0922 following an unexpected rise in employment in Canada in August. Traders noted dollar/yen options expiries worth over $1 billion later on Friday, including strikes worth $800 million at 91.60 yen.
The euro was flat at $1.4260, capped by good technical-related selling at the 100-day moving average of $1.4282 and options-related selling ahead of large expiries later in the day at $1.4300. There are also large euro/dollar options strikes at $1.4400 rolling off after the US jobs data on Friday, traders said. "It's a very large expiry list today, probably the biggest of the year so far ... so this might start to have the 'magnet effect' on spot if payrolls does not surprise either way," said one trader in London.