July 5, 2013 / 7:56 AM / in 5 years

FOREX-Euro extends losses, U.S. jobs data to sway dollar

* Euro, sterling extend losses against dollar
    * Fed left alone with stimulus unwinding plan, dollar
    * Markets turn focus on U.S. payrolls

    By Anirban Nag
    LONDON, July 5 (Reuters) - The euro dipped towards a
five-week trough against the dollar on Friday, hit by a European
Central Bank pledge to keep interest rates low and vulnerable to
more losses if U.S. jobs data turns out strong.
    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 pledged on Thursday to 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, also pointing to
more gains for the dollar.
    The 10-year gap between Treasuries and UK gilts 
was heading towards its highest in seven years after new Bank of
England governor Mark Carney also signalled UK rates would stay
low. That also drove sterling to a near four-month low
of $1.4998.
    "Euro and sterling are both reeling after central banks
moved to depress short-term rates and said any tightening will
lead to a response," said Chris Walker, currency strategist at
Barclays. "In that scenario, the currencies will only weaken".
    "Add to that, if the U.S. jobs numbers beat expectations,
then we could see the dollar extend gains."
    The euro fell to $1.2884, down 0.2 percent on the
day, having hit a five-week low of $1.2883 on Thursday. The
dollar index was up at 83.935, its highest since late May and
within reach of its May 23 peak of 84.498, a break of which
could add fresh momentum to the currency.
    Forecasts are for a 165,000 rise in U.S. employment, with
the jobless rate ticking down to 7.5 percent, edging closer to
"the vicinity of 7 percent", which Fed Chairman Ben Bernanke has
signaled as a level at which bond buying could stop.
    The dollar also gained 0.2 percent to 100.28 yen,
ticking up towards Wednesday's one-month high of 100.86.
    Despite the firmness in the dollar, the option 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.
    "This is likely a result of speculators unwinding their bets
against the yen," said Osamu Takashima, chief FX strategist at
Citigroup Global Markets Japan.
    "That seems to suggest that, if you look at two to three
week terms, speculators will have fresh capacity to sell the
yen," he said, adding that Japan's upper house election on July
21 could be a trigger for yen selling.
    Prime Minister Shinzo Abe and his coalition partner are
expected to score a hefty victory, likely ending years of a hung
parliament in Japan.
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