Dollar drops from four-month high as traders weigh US outlook

[NEW YORK] The dollar fell from a four-month high as traders weighed the outlook for the US economy before the Aug 7 employment report.

The US currency declined against most of it major peers and dropped as much as 1.6 against its Australian counterpart as that nation's central bank held interest rates unchanged and omitted any reference to further currency declines being necessary. The US jobs report may help guide Federal Reserve policy makers as they determine whether the economy is expanding fast enough to merit the first interest-rate increase in almost a decade.

"It's had a good run over the last six weeks and it's kind of natural to see people scale back," Greg Anderson, Bank of Montreal's global head of foreign-exchange strategy, said by phone from New York, referring to the dollar. "We're just seeing profit-taking and people squaring up a little bit ahead of payrolls."

The Bloomberg Dollar Spot Index fell 0.2 per cent to 1,209.68 at 9:34 am in New York, after closing Monday at the strongest level since March 17. The greenback dropped 0.2 per cent to $1.0967 per euro and was little changed at 124 yen.

"The dollar weakness was initially started by the Australian central-bank decision," said Eimear Daly, a currency strategist at Standard Chartered Plc in London.

Reserve Bank of Australia Governor Glenn Stevens and his board kept the cash rate at a record-low 2 per cent, as predicted by markets and economists following reductions in May and February. The Aussie is down more than 30 per cent since a peak in 2011 versus the dollar.

A rebound in oil prices on Tuesday supported raw materials prices and boosted commodities currencies against the US dollar. The Bloomberg Commodity Index climbed 0.8 per cent, snapping a three-day loss.

US payrolls probably rose by 225,000 in July, according to the median estimate of 83 analysts surveyed by Bloomberg News. That compares with 223,000 in June.

Traders are pricing in a 38 per cent probability that the Fed will raise interest rates in September, based on the assumption that the effective fed funds rate will average 0.375 per cent after the first increase. That compares with the 48 per cent chance traders saw July 30.

"We would be cautious on extending exposure to US dollar longs in the near-term," BNP Paribas SA strategists including Steven Saywell said in a note. He was referring to bets that the dollar will rise. "Our economics team expects a below consensus jobs report on Friday, which should further sap US dollar momentum."

BLOOMBERG