FOREX-Dollar heads for modest weekly rise, balancing Fed outlook and US data

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Dollar kicked off five-day winning streak after Fed signals last week

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Markets overreacting to labour market hints, Jefferies says

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Weak Chinese trade data may spell trouble for the euro zone

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Yen still seen as the leading defensive hedge

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By Stefano Rebaudo

Nov 7 (Reuters) - The U.S. dollar was on track for a modest weekly gain as investors sought to balance the impact of the Federal Reserve's hawkish tilt against lingering concerns over the U.S. economy. The dollar started a five-day winning streak last week after Federal Reserve Chair Jerome Powell acknowledged the risky nature of making further easing moves but dropped sharply on Thursday on soft labour data. U.S. Treasury yields also fell on concerns over economic uncertainty caused by the government shutdown in Washington and questions over the legality of President Donald Trump's tariffs.

"With the December Fed meeting more or less a coin toss which crucially depends on labour market picture, market is overreacting to any hints about the labour market," said Mohit Kumar, an economist at Jefferies, noting the lack of economic data as the government shutdown continues.

"Our view remains that Powell comments from the last FOMC meeting suggest that the bar for a December cut is high," he added. With the U.S. government shutdown postponing the release of the monthly non-farm payrolls report, traders have turned to private sector data showing the economy shed jobs in October in the government and retail sectors. Cost-cutting and the adoption of artificial intelligence also led to a surge in layoffs.

Barclays forecast earlier this week a 60% chance that the U.S. government shutdown - the longest in U.S. history - would end between November 11 and 21, while assigning a 15% probability that it could extend into December.

The dollar index, which measures the currency's strength against a basket of six peers, appreciated 0.14% to 99.81 and was on track for a 0.08% weekly rise. It has recovered some strength but remained lodged within the same trading range it has sat in since August.

A rush into safe-haven assets earlier this week supported the U.S. dollar, which has regained some of its safe-haven appeal, analysts said, even as the Japanese yen emerged as the market's preferred defensive play.

Tech-heavy stock markets were heading for their biggest weekly falls in seven months. Traders ramped up bets on a rate cut even as Chicago Federal Reserve President Austan Goolsbee said on Thursday the lack of official data on inflation during the government shutdown "accentuates" his caution about cutting interest rates further. "When it's foggy, let's just be a little careful and slow down," he told CNBC.

Trading in Fed funds futures implies a 65% chance of a cut at the U.S. central bank's next meeting on December 10, according to the CME Group's FedWatch tool.

The euro fell 0.1% against the dollar to $1.1535, outperforming other European currencies such as sterling and the Swiss franc.

Chinese exports unexpectedly fell in October, marking their steepest decline since February, after months of frontloading U.S. orders to beat U.S. tariffs on imported goods.

The data suggests Beijing may have struggled to diversify exports away from the U.S., a trend that could stoke fears of mounting Chinese pressure on European markets.

The euro is drawing support from expectations of a steady policy rate, while both the U.S. and UK are seen cutting rates further in 2026.

The dollar rose 0.23% against the yen to 153.41, after hitting 152.82 earlier in the session, its lowest level since October 30.

The Australian dollar was flat at $0.6480, while the kiwi fell 0.4% to $0.5609.

(Reporting by Stefano Rebaudo; additional reporting by Gregor Stuart Hunter; Editing by Sam Holmes and Emelia Sithole-Matarise)