The US dollar fell against a basket of major currencies in early September, as mixed signals over the Federal Reserve's next policy move kept investors cautious ahead of a closely watched inflation report, while a sharp rally in the Japanese yen weighed on currency markets.
The Bloomberg Dollar Spot Index, which tracks the US currency against a basket of its peers, ended the week down 0.7%. The index pared some of its losses on Friday after stronger-than-expected US jobs data raised expectations that the Fed could raise interest rates later this month.
Traders are now pricing in about a 60% chance of a 25-basis-point rate increase, up from around 50% before the jobs report was released. That has increased the significance of next week's consumer price data, according to Noah Buffam, a strategist at CIBC Capital Markets, a division of Canadian Imperial Bank of Commerce.
Buffam said the dollar's next move would likely depend on next week's inflation reading and what it means for the Fed's September decision.
Earlier in the week, the dollar had dropped to its lowest level since May, after Federal Reserve Board member Christopher Waller pointed to progress on inflation, tempering expectations of an imminent rate rise. The Federal Reserve is the central bank of the United States and sets the country's benchmark interest rate.
Waller's remarks were seen as a little more dovish than most investors had expected, according to Chris Turner, head of global markets at ING Groep, the Dutch banking and financial services group.
Yen posts best week since July
The dollar's weekly decline was compounded by a strong rally in the yen, which had its best week since July, gaining about 2.4% against the US currency.
The yen's gains were driven by expectations that the Bank of Japan could raise its benchmark interest rate by 25 basis points this month, while leaving open the possibility of faster increases later on. The Bank of Japan is Japan's central bank.
Jobs data and inflation outlook
Data released on Friday showed US job growth accelerated significantly in August, while the unemployment rate held steady at 4.1%.
The critical inflation report due next week could reinforce expectations about the Fed's next move and, in turn, influence the dollar's trajectory.
Buffam said there was a risk the data could come in too hot, which could give the dollar room for a short-term rally.
By contrast, an inflation reading in line with forecasts would likely help the Fed avoid a rate increase in September, keeping the broader environment negative for the dollar, said Jayati Bharadwaj, head of currency strategy at TD Securities.
Markets bet on further dollar weakness
Options data show investors are becoming increasingly pessimistic about the dollar's outlook. One-month risk reversals, a gauge closely watched for market positioning, turned bearish on the dollar once again.
Wall Street strategists are also positioning for further weakness in the US currency. Bank of America is recommending selling the dollar against the yen, forecasting that the Japanese currency will strengthen to 149 yen per dollar by the end of the year.
TD Securities, meanwhile, maintains what it describes as a moderately bearish view on the dollar for the rest of the year.
