Dollar rebound slows as FX markets hover near thresholds

NEW YORK/LONDON: The dollar's rebound slowed on Wednesday with the euro and Japanese yen holding near widely watched levels as foreign exchange markets looked for clues to their next move, possibly from the US jobs report on Friday.

The euro hung just above a two-month low of $1.20 as the yen spent a second day around 105.

The broader dollar index was up 0.05% at 91.134 in morning trading in New York after rising to a two-month high of 91.283 during the previous session.

The dollar is up 1.3% this year as investors look to a widening disparity between the strength of the US and European pandemic recoveries.

"The dollar bounce has slowed but may not be over," strategists at Brown Brothers Harriman wrote on Wednesday.

The battle seems be between the US economic growth and vaccination advantages versus the appetite for currency diversification and investment risk that usually works against the dollar, the strategists said.

The euro largely shrugged off news that former European Central Bank chief Mario Draghi had accepted a request to try to form a new Italian government even as European bond and stock markets cheered.

Nor were currency markets moved by a US report that hiring by private employers rebounded more than expected in January. The ADP National Employment Report showed private payrolls increased by 174,000 jobs in the month when economists were expecting an additional 49,000.

Though the ADP report has a spotty record predicting the private payrolls count in the US government's employment report because of methodology differences, it is still watched for clues on the labor market's health.

Economists expect the closely watched government report due on Friday to show US nonfarm payrolls increased by 50,000 jobs in January.

The dollar's advances have come despite a rally in equities and improving risk sentiment, defying the currency's historical inverse directional relationship with stocks.

However, many analysts expect that correlation to reassert itself as the year progresses and for the dollar to decline with global growth supported by massive fiscal stimulus and ultra-easy monetary policies which could kindle inflation.

The yen has been steady against the dollar after the greenback benefited from a long and massive bout of short-covering.

"It's been a nice run for the yen in terms of strength, but I think there's maybe some tiring of that move and some retracement," said Bart Wakabayashi, Tokyo branch manager of State Street Bank and Trust.