Dollar holds gains on optimism for economic outlook

The dollar traded near its strongest in more than two months against the euro and the yen on Thursday as pessimism about the US economic outlook recedes before the release of important data on the jobs market.

The British pound held steady against the dollar and traded near an eight-month high versus the euro ahead of a Bank of England policy meeting that will publish findings on the feasibility of negative interest rates.

Sentiment for the dollar has improved recently as progress in coronavirus vaccinations, moves by US President Joe Biden to pass more fiscal stimulus, and improving economic data forced some bearish investors to give up their short positions.

The dollar faces another test on Friday with the release of non-farm payrolls data, which will help confirm whether the world’s largest economy has been able to shrug off a dip in growth toward the end of last year.

“The dollar’s recovery was triggered by a rebound in yields and an increase in inflation expectations,” said Junichi Ishikawa, senior foreign exchange strategist at IG Securities.

“This is supporting the dollar, which now has more room to rise against the euro, because the euro zone looks like it is lagging behind US economic growth.”

Against the euro, the dollar stood at $1.2040, close to a nine-week high.

The pound bought $1.3647, stabilising after a 0.2% decline in the previous session. Sterling traded at 88.23 pence per euro, near the strongest since May last year.

The dollar was quoted at 104.98 yen, near its highest since mid-November.

Data due on Friday is forecast to show the US economy added 50 000 jobs in January, which would be a mild recovery from shedding 140 000 jobs in the previous month as a spike in coronavirus infections curbed economic activity.

Since the start of the year expectations for big fiscal stimulus under Biden’s Democratic government have supported sentiment.

The pace of vaccinations in the United States has also picked up, causing many investors to temper their pessimism.

The dollar index against a basket of six major currencies stood at 91.066, not far from the highest since early December.

The Bank of England is not expected to change interest rates or quantitative easing at its meeting on Thursday, but sterling will be closely watched as investors try to measure the likelihood of negative interest rates.

Elsewhere, the Australian dollar edged up to $0.7634, supported by hopes for US stimulus.

Reserve Bank of Australia will update its economic forecasts on Friday, which could determine whether the Aussie continues to rise.

Across the Tasman Sea, the New Zealand dollar rose to $0.7220.