The dollar dipped to a two-month low against the euro yesterday as investors took profits after data showed robust gains in US jobs, reinforcing prospects for an interest rate rise later this month.
The US economy added 248,000 new non-farm jobs in May according to data released last week, above the median estimate of 216,000 in a Reuters survey. April's number was also revised upward to 346,000 from 288,000, surprising the market.
"The US jobs data was stronger than expected, but not exactly spectacular, and not enough to change expectations that the Fed will raise rates by 25 basis points this month," said Toshiaki Kimura, forex manager at Mitsubishi Trust and Banking.
A poll of 22 top economists on Wall Street, taken after the jobs report, was unanimous in forecasting the Federal Reserve will raise benchmark interest rates by 0.25 percentage point from a 46-year low of one per cent at a policy meeting on June 29-30.
The survey showed that speculation for a bigger 0.50-percentage point rise had receded.
"It has become clear that the Fed will raise rates later this month," said Kota Kimura, assistant forex manager at Shinkin Central Bank.
"But we still don't know the pace of the Fed's tightening after that. It's even harder to know how money will flow. So I don't think a clear trend will emerge."
The euro briefly rose to $1.2335, its highest level in two months and about 0.4 per cent above what it was fetching in late New York trade on Friday.
"We're seeing a bit of profit-taking on the dollar now, but I don't expect this sell-off to last for long," said Mitsubishi Trust's Kimura, who expects the dollar/yen rate to float between 109 and 113 yen this week.
The sterling also posted strong gains against the dollar, rising as high as $1.8472 before easing to around $1.8465 compared with $1.8375 in late US trade.
The Bank of England is expected to raise its benchmark interest rate on Thursday from 4.25 per cent, a prospect that should keep the pound well supported until then, analysts say.
The market is also waiting on rate-setting decisions from the Bank of Canada and Reserve Bank of New Zealand, both due later in the week.
Traders are looking to this week's data on US producer prices and consumer sentiment to see whether they might bolster the case for faster US rate rises than currently expected.
Figures for May producer prices are expected to show a 0.6 per cent gain, while the University of Michigan's consumer sentiment survey, due on Friday, is seen steady at 90.2 in June.
Data from Japan's finance ministry yesterday showed that foreign reserves rose to $816.848 billion in May, up from $814.969 billion in April.
The ministry said late last month that the government had not conducted foreign exchange intervention in May.