FOREX-Dollar drops as investors embrace risk ahead of U.S. jobs data

Wed Sep 4, 2013 12:39pm EDT

Related Topics

* Dollar falls from six-week high against other major currencies

* U.S. data boosts bets that Fed to taper stimulus in September

* ECB seen likely to reaffirm low rates

* U.S. jobs data on Friday could push dollar higher

By Julie Haviv

NEW YORK, Sept 4 (Reuters) - The dollar dropped against the euro on Wednesday for the first time in six sessions and retreated from a six-week high against a basket of currencies as data reflecting a growing world economy boosted investors' risk appetite.

After notching significant gains in recent days, the greenback's weakness was the most pronounced against growth-linked currencies, with the Australian and New Zealand dollars both rising more than 1 percent.

While the greenback remains widely sought for its status as a safe haven amid uncertainty surrounding a possible U.S.-led attack on Syria, investors opted to book profits ahead of Friday's key U.S. nonfarm payrolls report.

Strong August job gains will cement expectations that the Federal Reserve will announce plans to trim its stimulus when it meets later this month, which should buoy the dollar.

"The trade data today was not super supportive of the dollar, but today's price action was mostly flow driven and people are taking profits after the dollar's recent strong run," said Charles St-Arnaud, foreign exchange strategist at Nomura Securities in New York.

"While we are still expecting the Fed to announce plans to taper this month, there is still some uncertainty headed into Friday's jobs data," he said.

Data on Wednesday showed the U.S. trade deficit widened slightly more than expected in July as exports dipped, but a rebound in imports pointed to some firming in underlying domestic demand early in the third quarter.

The dollar index, which is strongly correlated with U.S. 10-year Treasury yields, was down 0.3 percent at 82.084, below Tuesday's peak of 82.516, its highest since July 22.

The dollar last traded up 0.1 percent at 99.64 yen, according to Reuters data.

The possibility of military strikes on Syria was seen moving a step closer early on Wednesday after Russian President Vladimir Putin signaled a readiness to drop his opposition if Damascus were proven to have carried out a chemical weapons attack.

But he also said later on Wednesday the U.S. Congress had no right to approve the use of force against Syria without a decision from the U.N. Security Council, and that doing so would be an "act of aggression."

Putin's comments came after U.S. President Barack Obama clinched the backing of key Republican leaders in Congress for his plan to punish the Syrian government with limited strikes, though no vote on any such proposal is due until next week.

EURO SOUGHT

Investors bought the euro, which hit its cheapest level against the dollar since late July in the previous session, after data showed euro zone businesses had their best month in over two years in August as orders increased for the first time since mid-2011.

Other data showed growth in China's services sector hit a five-month high, underpinned by new orders and business optimism.

The euro was last up 0.3 percent at $1.3214, far above Tuesday's trough of $1.3137, its lowest since late July.

Strong data in the U.S. manufacturing sector on Tuesday firmed bets the Fed will begin tapering stimulus at its policy meeting on Sept. 17-18, unless the U.S. payroll numbers due on Friday fall short of forecasts.

Investors also faced a busy period of potentially market moving events in the next few days, including a Group of 20 summit in St Petersburg, policy decisions on Thursday from the Bank of England, Bank of Japan and European Central Bank, and the U.S. jobs report on Friday.

Positioning is also favoring the dollar according to Ulrich Leuchtmann, head of FX research at Commerzbank in Frankfurt.

"People have had dollar short positions over recent weeks, which have become risky ahead of the U.S. jobs report, so some want to get rid of these. This is also driving dollar strength," he said.

The ECB on Thursday is expected to reaffirm it will keep interest rates low to support the euro zone's fragile recovery.

This would be in contrast to the Fed's plans on moving away from its ultra-loose policy, so interest rate differentials will see the euro slip against the dollar.

"If the ECB uses strong language to enforce forward guidance, trying to keep interest rates low, this would be negative for the euro," said Leuchtmann.

Caution ahead of this week's central bank meetings as well as the possibility of a U.S. military strike on Syria were likely to keep major currency pairs in recent ranges.

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