The dollar is likely to trend lower in the week ahead in the aftermath of an abysmal US jobs report on Friday and without clear signs of progress on the approaching US debt ceiling deadline.
The US dollar fell against the yen, Swiss franc and sterling on Friday as significantly weaker-than-expected US jobs data raised expectations that the Federal Reserve will leave interest rates low well into next year. The US Treasury runs out of cash to pay its bills on August 2 unless the government is legally allowed to borrow more. With the United States long regarded as the most stable country with its currency used as the global reserve, even talk of a US debt default has sent shudders through international markets.
The rapidly approaching deadline has for now overshadowed debt problems in the euro zone. Friday's jobs report showing only meager growth in June payrolls added to the gloom surrounding the US dollar as investors see the government and Federal Reserve as failing in efforts to stoke economic growth despite a huge stimulus program and rise in borrowings.
"US policy (on debt) has been extend and pretend," said Douglas Borthwick, managing director of Faros Trading in Stamford, Connecticut. "We've come to an end of that." The euro is down 1.9 percent against the dollar this week, while the dollar is down 0.2 percent against the yen. The euro is now up 6.6 percent against the dollar year to date, while the dollar is down 0.7 percent against the yen in 2011.
One-month euro/dollar risk reversals last traded at -2.55 on Friday, according to Reuters data, with a bias toward euro puts and dollar calls, suggesting more investors are betting the euro will fall than will rise. But investors are less bearish than a few weeks ago when the same risk reversal traded at -3.4, its lowest since June 2010. Trying to break a budget deadlock and allow for an increase in the $14.3 trillion debt ceiling, Obama and congressional leaders are aiming for more than $2 trillion in budget savings and possibly as much as $4 trillion.
With Republicans and Democrats still far apart, US President Barack Obama has scheduled another round of talks for Sunday. While no deal is expected, investors will be seeking any clue that there is at least compromise. "Any headline indicating they are closer to an agreement will be dollar positive," said Jessica Hoversen, foreign exchange and fixed income analyst at MF Global in New York.
US employment growth ground to a near halt in June, data from the US Labour Department on Friday showed, with employers hiring the fewest workers in nine months, dampening hopes the economy was on the cusp of regaining momentum after stumbling in recent months. The euro initially tumbled to a session low of $1.4204 on Reuters data, then trimmed losses, with traders saying the sharp drop toward the $1.42 level triggered short-term buying. It last traded at $1.4255, down 0.7 percent on the day.