The U.S. dollar eased on Monday as investors awaited testimony from Federal Reserve Chair Jerome Powell ahead of the February jobs report at the end of the week that will likely influence how much more the U.S. central bank will raise interest rates.
The dollar index , which measures the performance of the U.S. currency against six others, was last down 0.1% at 104.53. The index last week clocked a weekly loss for the first time since January.
After delivering jumbo hikes last year, the Fed has raised interest rates by 25 basis points at its last two meetings, but a slew of resilient economic data has stoked market fears the central bank might return to its aggressive path.
Futures imply a 72% chance the Fed will raise interest rates by 25 basis points at its meeting on March 22.
The spotlight will be firmly on the February jobs report scheduled for Friday and Powell's testimony to Congress on Tuesday and Wednesday.
"Are we going to have a continuation of the February outlook of 'higher for longer' or are the markets going to come back to 'January payrolls is going to be a bit of an outlier and maybe the economy is slowing'," she said.
In early February, the January monthly employment report showed blisteringly fast job growth and sustained wage inflation, which was enough - together with strong reads of consumer spending and business activity later in the month - to convince investors that the U.S. central bank won't have any reason to cut rates this year.
The dollar has risen by around 2% since then, largely at the expense of the Japanese yen, which has lost around 5% in value against the U.S. currency in that time.
The euro , which has lost around 3% against the dollar since early February, was last flat on the day at $1.0637.
Weekly futures data on Friday showed money managers are holding the largest bullish euro position in over two years, which drove the currency to nine-month highs in February. But now that's leaving it looking vulnerable to a steep sell-off, especially if investors' outlook for U.S. rates does not shift and euro zone economic data doesn't show a material improvement.
"At this stage, people probably extended those positions assuming a recovery story and what they’re getting instead is a technical recession followed by some resilience and that’s not good enough," Rabobank's Foley said.
Citi strategists expect Powell to indicate a preference for a 25-bps hike but leave all options on the table, since he will speak before the jobs data.
Citi expects an increase in payrolls of 255,000 following January's 517,000 jump. A large surprise on the upside could lead to a 50-bps hike from the Fed, the strategists said.
The yen was last down 0.2% on the day at 136.02, ahead of the final policy meeting on Friday for Bank of Japan Governor Haruhiko Kuroda.
If Kuroda ends his term with a very dovish tone, that could spell trouble for the yen, especially if U.S. yields continue their run higher this week, Saxo Markets strategists said.
Elsewhere, China's yuan fell against the dollar, after Beijing set a modest target for 2023 economic growth of around 5%. The offshore yuan fell as much as 0.65% to 6.938 per dollar, while the Australian dollar, often traded as a liquid proxy for the yuan, fell 0.5% to $0.6737 .
