* Euro, sterling extend losses against dollar
* Fed left alone with stimulus unwinding plan, dollar
* Markets focus on U.S. payrolls
By Anooja Debnath
LONDON, July 5 The euro struggled near a
five-week trough against the dollar on Friday, hurt by the
European Central Bank's pledge to keep policy accommodative, and
looked vulnerable to more losses if U.S. jobs data beats
The dollar could test near three-year high against a basket
of currencies hit in May , traders said, if the
payrolls data due at 1230 GMT shows improvements in line with
the Federal Reserve's forecast.
That would bolster expectations that the U.S. central bank
will start slowing its asset purchases as early as September.
In sharp contrast, the ECB said on Thursday it would keep
rates low for an extended period, driving the yield gap between
10-year U.S. Treasury bonds and German Bunds
to its widest since April 2010 and pointing to
more gains for the dollar.
The 10-year gap between Treasuries and UK gilts
was heading towards a seven-year high after new Bank of England
chief Mark Carney also signaled UK rates would stay low. This
drove sterling to a near four-month low of $1.4963.
"For the most part this morning it has been a rates-view
dominated trade, after the ECB and BoE yesterday, spilling over
to the FX markets and keeping the euro and sterling low," said
Stephen Gallo, currency strategist at BMO Capital Markets.
"A much stronger overall employment picture from the U.S. is
probably going to make the strength in the dollar against the
both these currencies a bit more outsized than it would have
been had those policy shifts not occurred."
The euro was down 0.3 percent on the day at $1.2880,
having hit a five-week low of $1.2869 earlier. The dollar index
was up at 83.996, its highest since late May and within reach of
its May 23 peak of 84.498.
Forecasts are for a 165,000 rise in U.S. employment and the
jobless rate inching down to 7.5 percent, edging closer to "the
vicinity of 7 percent", which Fed chief Ben Bernanke has
signaled as a level at which bond buying could stop.
The dollar held close to the 100 yen mark and could
re-test Wednesday's one-month high of 100.86. Support was cited
at its 50-day moving average of 99.463 yen.
Despite the firmness in the dollar, the options market is
showing strong demand for dollar/yen puts, or bets the U.S.
currency will lose ground, with risk reversal spreads near the
widest level in favour of dollar puts in two weeks.
Analysts said this was due to speculators unwinding their
bets against the yen and in a few weeks time they would have a
fresh capacity to sell the yen.
But some strategists cautioned against aggressively betting
on further dollar strength against the yen.
"We now recommended increased caution with long (dollar/yen)
positions, given the likelihood of a further corrective setback
before the longer-term uptrend is resumed," said strategists at
Morgan Stanley. "Strong U.S. data leading to increased tapering
expectations and a risk-off environment will put dollar/yen
under pressure, in our view."