(Bloomberg) -- The dollar extended its rebound to a fifth straight session as US traders returned from a holiday to a week packed with economic data.
The greenback gained against most its Group-of-10 peers apart from the Japanese yen and Swiss franc on Tuesday as the Bloomberg Dollar Spot Index inched up 0.1%. The Australian dollar and Norwegian krone fell more than 1% against the greenback, becoming the worst performers in the group.
Investors awaited US economic data including services Thursday and key non-farm payroll figures Friday to see if market pricing for Federal Reserve policy easing is justified. The market is pricing in a one-in-four chance that the Fed will cut its benchmark rate by more than 25 basis points this month.
“We have expected some interim rebound in US yields and hence the dollar” as investors await labor market data, said Frances Cheung, head of foreign-exchange and rates strategy at Oversea-Chinese Banking Corp. in Singapore. “An in-line payroll outcome may be enough for the market to pare back some near-term Fed rate-cut expectations.”
Bloomberg’s dollar gauge posted its first back-to-back monthly drop this year in August as Fed Chair Jerome Powell said “the time has come” to adjust policy. Still investors are questioning whether US economic growth and inflation have slowed enough to lead the central bank into a 50 basis point rate cut at its Sept. 17 to 18 meeting.
The first test for the market would be the August ISM manufacturing data due later Tuesday. The gauge will probably rebound for the first time since March, economists forecast.
“The greenback remains at risk of further bullish extension should the US August ISM manufacturing surprise to the upside and spur a more material repricing of rate-cut bets,” Malayan Banking Bhd strategists led by Saktiandi Supaat wrote in a note.
Morgan Stanley sees political uncertainty in Europe, paired with the upcoming US election, keeping the dollar buoyed, and is skeptical the US Dollar Index can break below the key 100 level.
The yen defied Tuesday’s dollar move and outperformed its Group-of-10 peers after Bank of Japan Governor Kazuo Ueda reiterated his plan to tighten policy further. The Japanese currency surged more than 1% against the US dollar, touching 145.16 per greenback, the first gain in five sessions. Strategists say a lot depends on the dollar path and the US central bank for the yen.
“The Fed says it is data dependent and thus the market has become heavily data dependent as well,” said Karl Steiner, head of analysis at Skandinaviska Enskilda Banken AB. That makes it interesting to observe where market conditions are stretched, with positioning more neutral on the yen than in early August, he said.
--With assistance from Alice Atkins, Anya Andrianova and Cristin Flanagan.
(Updates market pricing throughout.)
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