Dollar Edges Lower, But Retains Strength Versus Yen After Payrolls

By Peter Nurse - The U.S. dollar posted more gains against the Japanese yen in early European trade Monday, although was subdued overall after last week’s strong U.S. nonfarm payrolls number raised expectations for further aggressive monetary tightening by the Federal Reserve.

At 3:05 AM ET (0705 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 106.435, edging back from Friday’s peak of 106.93, the strongest level since July 28.

However, USD/JPY climbed 0.2% to 135.40, just off the 135.58 level seen earlier Monday, which was the highest level also since July 28.

The prime driver behind these moves was the red-hot July U.S. jobs report, which stated that nonfarm payrolls increased by over 500,000 last month, over double the amount expected.

This suggests the country’s labor market remains strong, even after a series of hefty interest rate rises to combat inflation, and gave the Federal Reserve considerable license to continue with a super-sized hike in September.

This helped U.S. Treasury yields push higher, with the 10-year yield trading at 2.82%, close to the two-week high of 2.869% touched Friday.

Attention will now turn to Wednesday’s U.S. consumer price index release, with another large number likely to cement another increase along the lines of the 75 basis points hike seen from the Fed last time out.

The July CPI figure is expected to ease to 8.7% on an annual basis from 9.1% previously, but the core CPI, which excludes volatile food and energy prices, is expected to increase by 0.5% month-over-month, pushing the annual rate up to 6.1% from 5.9% in June.

Elsewhere, EUR/USD edged lower to 1.0178, with the single currency struggling to benefit from the risk-on sentiment seen in the stock markets after Moody's cut its outlook on Italian debt to negative following the resignation of the highly regarded Mario Draghi as prime minister, throwing Italian politics into turmoil.

GBP/USD rose 0.1% to 1.2080, with sterling vulnerable to more selling after dropping as low as 1.2003 on Friday, a day after the Bank of England warned of the likelihood of a prolonged recession starting later this year.

U.K. GDP for June, as well as the second quarter, is due for release on Friday, and is expected to show a sharp slowdown of 1.2% on the month as the country struggles with a severe cost-of-living crisis.

AUD/USD gained 0.4% to 0.6934, while USD/CNY edged higher to 6.7638 after China's exports rose 18.0% in July from a year earlier, the fastest pace this year, as the country struggles to recover from a COVID-induced slump.

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