FOREX-Fed 'skip' chatter triggers dollar's biggest weekly fall since January

BY Reuters | ECONOMIC | 06/02/23 07:27 AM EDT

(Adds payrolls forecast in paragraph 12, comment in paragraph 13, refreshes prices throughout)

By Amanda Cooper

LONDON, June 2 (Reuters) - The dollar headed for its largest weekly fall since mid-January on Friday as the view took hold among investors that the Federal Reserve will forgo an interest rate hike this month, which would diminish the greenback's appeal to non-U.S. buyers.

The U.S. Senate's passage of a bill to suspend the debt ceiling and avert a disastrous default also removed a pillar of support for the dollar, which had paradoxically been a key beneficiary of the uncertainty because of its safe-haven status.

The Australian dollar surged after an increase in the minimum wage there stoked bets for another raise in rates next week.

The dollar index, which measures the U.S. currency against six others, has dropped nearly 0.8% this week, its biggest weekly loss since mid-January. It was last down 0.1%.

"With the debt ceiling in the rear-view mirror, focus is very much back on central banks and economic data," City Index markets strategist Fiona Cincotta said.

"The problem is we've really had quite mixed messages so, yes, more recently we had two officials mentioning a skip in June, but that doesn't rule out a hike later in the summer, or even in July, so I think that expectation could still keep the dollar supported," she said.

"Also, let's not forget inflation is still high."

Philadelphia Fed President Patrick Harker said on Thursday "it's time to at least hit the stop button for one meeting and see how it goes", referring to the June 13-14 Fed meeting.

A day earlier, Fed Governor Philip Jefferson said "skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming".

Some softness in U.S. manufacturing data overnight supported the case for a pause, although jobs figures continue to print hot, putting even more focus than usual on the monthly non-farm payrolls report at 1230 GMT.

Money markets are pricing in a roughly 29% chance of a June hike, down from near 70% earlier in the week.

Economists polled by Reuters expect non-farm payrolls to have increased by 190,000 in May, from April's 253,000 rise.

"We have had 13 straight months were jobs numbers have surprised positively and if we get a very strong reading that changes the outlook for the June fed meeting, when the market expects a pause," Guy Miller, chief market strategist at Zurich Insurance, said.

The dollar edged into positive territory against the yen, having logged its longest streak of daily losses against the Japanese currency since last November, with four days of declines. The dollar was last flat at 138.8 yen.

The pair tends to track U.S. long-term Treasury yields , which were unchanged on the day at 3.61% after falling to their lowest since Nov. 18 overnight.

The euro rose 0.1% to $1.0767, its highest in around a week, thanks to a boost on Thursday from European Central Bank President Christine Lagarde, who said further policy tightening was necessary.

Meanwhile, the U.S. Senate passed a bill to lift the government's $31.4 trillion debt ceiling on Thursday, readying it for President Joe Biden to sign ahead of Monday's deadline.

"This clears the last residual bound to everything getting done and dusted by Monday's X-date," said Ray Attrill, head of foreign-exchange strategy at National Australia Bank (NAUBF) .

"At the margin, it plays with the grain of the more risk positive view in the market, which is proving to be U.S. dollar negative."

The Aussie rose by as much as 0.93% to $0.663, its strongest since May 24. The primary driver was an announcement by Australia's independent wage-setting body that it would raise the minimum wage by 5.75% from July 1.

Traders currently place a 67% chance the Reserve Bank of Australia (RBA) will raise rates by 25 basis points. Even if a hike doesn't happen next week, markets expect one by autumn.

(Additional reporting by Dhara Ranasinghe in London and Kevin Buckland in Tokyo Editing by Mark Heinrich, Mark Potter and Andrew Heavens)

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