Dollar flat ahead of US jobs report, euro digests ECB cut

By Alden Bentley, Alun John and Rae Wee

NEW YORK/LONDON/SINGAPORE (Reuters) -The dollar traded sideways on Thursday ahead of Friday's U.S. employment data that could help the Federal Reserve set a timetable for easing, while the euro held steady after a widely anticipated European Central Bank rate cut.

The euro rose 0.17% to $1.0887, approaching the 2-1/2 month peak of $1.0916 hit earlier in the week. Against the Japanese currency it was off 0.09% at 169.57 yen.

The dollar index, which measures the greenback against a basket of currencies including the yen and euro, was 0.09% lower at 104.16, barely reacting to news that applications for unemployment benefits rose more than expected last week to 229,000.

Weekly jobless claims were also slightly above last week's upwardly revised 221,000. The data supported this week's market narrative that labor market tightness is ebbing, which would be good for inflation and helped benchmark U.S. Treasury yields edge lower.

Inflation in the 20 countries that share the euro has fallen from more than 10% in late 2022 to just above the European Central Bank's 2% target in recent months, largely thanks to lower fuel costs and a normalization in supply after post-pandemic snags.

That progress has stalled recently and what had looked like the start of a major ECB easing cycle a few weeks ago now appears more uncertain due to signs that euro zone inflation may prove sticky, as has been the case in the United States.

"It was so much as expected, what ECB has said and done, that when you make the adjustments for the 25 basis point cuts right now the swaps market hasn't changed all that much," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

Chandler was referring to the euro zone/U.S. interest rate differentials that determine forward pricing for FX pairs and affect spot. He said it is not unusual for the dollar to weaken ahead of monthly employment release, then to rally back.

The Canadian dollar firmed 0.11% to C$1.37 per U.S. dollar a day after the Bank of Canada's expected rate cut.

Ahead of Friday's U.S. jobs report, investors are grappling with the implications for the Fed of several other pieces of U.S. data this week showing employment growth moderating, albeit along with a pick up in service sector activity.

The Federal Open Market Committee meets next week but is not expected to lower rates yet. Markets are pricing in two 25 basis points Fed cuts this year, with the first most likely in September.

The euro was also steady against the pound at 85.14 pence though towards the bottom of its recent range.

Versus the dollar, sterling was almost flat at $1.2790.

YEN RISES

The yen was firm at 155.65 per dollar as investors digested Thursday remarks from Bank of Japan Governor Kazuo Ueda that it would be appropriate to reduce the central bank's bond buying as it moves toward an exit from massive monetary stimulus.

The BOJ holds its two-day monetary policy meeting next week.

"This was almost a momentum play from the Japanese central bank - that is, add in JPY positive news flow when funding currencies - JPY and CHF - were already being covered and bought back, and the result was the JPY rally gaining additional legs," said Chris Weston, head of research at Pepperstone.

The Japanese currency had a brief rally earlier in the week as investors unwound positions in yen-funded carry trades, following a strong election victory for Mexico's ruling party which sparked concern about disputed constitutional reform.

That resulted in a squeeze on long peso/short yen positions, which has been a favourite among carry trades.

In a carry trade, an investor borrows in a currency of a country with low interest rates and invests the proceeds in a higher-yielding currency

The peso was down fractionally against the yen at 8.8703 yen, a day after rising 2.6%. It had fallen roughly 6% against the Japanese currency at the start of the week, in the wake of Mexico's election results.

In cryptocurrencies, bitcoin fell 0.43% at $70,887.00. Ethereum declined 0.88% at $3829.9.

(Additional reporting by Alun John and Rae Wee; Editing by Christopher Cushing, Jacqueline Wong, Sriraj Kalluvila, Toby Chopra, Franklin Paul and Richard Chang)