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NEW YORK/LONDON: The US dollar fell on Monday, as investors consolidated gains ahead of the closely-watched monthly employment report later this week, taking a pause after a furious rally that took the currency to a 1-1/2-year high on Friday.

The dollar index was down 0.3% on the day at 96.871, putting it on track for its largest daily fall since Jan. 12. On the month, the greenback was up 1.4%.

“A mix of consolidation and month-end position-squaring has nudged the dollar off its highs,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

“An events-filled week ahead threatens to keep market volatility high. The buck appears to have peaked for now as Friday’s jobs report is forecast to show another month of tepid hiring,” he added. US nonfarm payrolls are forecast to show a gain of 153,000 jobs for January, down from 199,000 in December, with the unemployment rate holding steady at 3.9%, according to a Reuters poll.

With the Federal Reserve clearly signalling last week that it intends to raise interest rates as early as March, money markets and major Wall Street banks are now expecting as many as five rate hikes this year.

Fed funds futures on Monday have also priced in five hikes for 2022, with a 24% chance of a 50-basis-point hike at the March 15-16 policy meeting. That’s down from as high as 32% on Friday.

The US central bank could also super-size a rate increase to half a percentage point if inflation remains stubbornly high, Atlanta Fed President Raphael Bostic told the Financial Times in an interview.

“Bostic is a non-FOMC voter so I would not get too carried away by his comments, but you could say he is testing the market waters,” said Kenneth Broux, a strategist at Societe Generale, referring to the central bank’s policy-setting Federal Open Market Committee.

“The debate of 25 bps (basis points) or 50 bps in March explains why the dollar should keep doing well and stocks could remain shaky in the short-term.”

The dollar’s 1.6% jump last week was its biggest weekly rise since mid-2021. Long-dollar positions remained near their highest levels this year.

A quicker pace of rate hikes is also seen as dampening future economic growth expectations, a scenario that is playing out in bond markets where spreads between 2-year and 10-year US Treasury yields fell below 59 bps for the first time since early November in a phenomenon known as “bear-flattening.”

The Australian dollar was among the early gainers versus the greenback, gaining 1%% to US$0.7068 before an Australian central bank policy meeting on Tuesday.

The Bank of England also holds its policy meeting on Thursday, with a Reuters poll of economists predicting a second rate hike in less than two months after inflation in the United Kingdom jumped to its highest level in nearly 30 years.

Sterling was last up 0.3% at $1.3447

The European Central Bank also has a policy meeting on Thursday. While no policy change is expected, analysts are starting to warn that approaching rate hikes from the Fed will shrink the ECB’s window for action.

The euro last changed hands at $1.1195, up 0.4%.

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