The dollar’s bounce back will be tested by the nonfarm payrolls report due later in the session

The dollar was steady on Friday, heading for its strongest weekly performance since July on pared expectations of sharp and early interest rate cuts this year ahead of closely watched U.S. payrolls data later in the day.

The greenback’s strong start has cast a shadow on the Japanese yen, with the Asian currency 2.5% lower against the dollar in the first week of the year, its weakest weekly performance since August 2022.

The dollar’s bounce back will be tested by the nonfarm payrolls report due later in the session.

Market probably got ahead of itself late last year in terms of pricing the soft landing, said Moh Siong Sim, currency strategist at Bank of Singapore, referring to 160 bps of cuts this year priced in by markets at the end of last year.

Fed officials in December forecasted 75 basis points of rate cuts in 2024, driving money-market bets for around double that amount, with market optimism spurring a year-end rally in stocks and bonds.

But since the beginning of the year, markets have pared their expectations. Traders are now pricing in less than 140 bps of cuts this year, with the chance of a cut in March at 65% versus 86% a week earlier, according to the CME FedWatch tool.

Sim said the data this week has shown that the U.S. labour market appears to be holding up and “perhaps the Fed will still need to stress the message of keeping the rates a bit longer than what the market has already priced in.”

But we will see, because tonight’s payroll data will be a key data to watch, Sim added.

U.S. private employers hired more workers than expected in December, data showed on Thursday, pointing to persistent strength in the labour market that should continue to sustain the economy.

That helped the dollar shrug off weakness and against a basket of currencies, the U.S. currency was at 102.51 on Friday. The dollar index is 1.1% higher for the week, its strongest performance since the week ending July 23.

The 10-year Treasury yield broke through the psychological 4% level and was at 4.002% in Asian hours, up 14 bps over the week.

The yen, which is highly sensitive to U.S. yields, softened 0.04% to 144.70 per dollar on Friday after hitting a more than three-week low of 144.955 earlier in the session.