By Daniel Leussink
TOKYO (Reuters) - The dollar was set for its worst week since March as it trod water on Friday ahead U.S. jobs data that is seen supporting chances of a U.S. interest rate cut, while the euro held gains made after a less dovish than expected central bank policy review.
The U.S. non-farm payrolls data for May due out later in the global day is expected to show a drop in hiring.
A slowdown in the U.S. labor market was evident in a worse-than-expected ADP (NASDAQ:ADP) National Employment Report released on Wednesday, which showed private U.S. employers added 27,000 jobs in May, the smallest monthly gain in more than nine years.
The dollar has been hit in recent weeks by the rising expectations for a U.S. rate cut before year-end, as an escalating China-U.S. trade row hurts business confidence and growth. Recent comments from Fed officials have also pointed to an easing in coming months.
Markets have priced in slightly more than a 50% probability rates will be cut 25 basis points by the end of July and one more cut would follow by the end of the year, according to the CME Group's FedWatch Tool.
"We've seen some fundamental changes when it comes to the Fed. In their hiking cycle, they've obviously been put on pause. If anything, the market is at least expecting a cut this year, if not two," said Bart Wakabayashi, Tokyo branch manager at State Street (NYSE:STT) Bank.
The European Central Bank (ECB) on Thursday ruled out raising interest rates in the next year and even opened the door to cutting them or buying more bonds as risk factors such as a global trade war and Brexit drag the euro zone economy down.
Still the market been expecting a stronger hint of rate cut, and consequently the euro and euro zone bond yields rose as a result, putting more pressure on the dollar.
Against a basket of six peers, the dollar was steady at 97.042, trading about 0.3% above an eight-week low of 96.749 brushed on Wednesday.
The index was on course for a 0.72% loss this week, its worst weekly performance since the week of March 15, when it gave up 0.73%.
"There's probably more reason to sell the dollar right now as opposed to the strength it usually carries as a safe haven," Wakabayashi added.
The euro jumped half a percent during the previous session as markets had positioned on a more dovish signal from the ECB and an acknowledgement of weak economic growth in the bloc.
The single currency last edged down 0.05% to $1.1269, but was still set for a weekly gain of 0.9%, its best weekly performance against the dollar since late September last year, when it rose nearly 1.1%.
"I think the ECB policy was quite dovish as the forward guidance was prolonged, but the market was hoping the bank would be even more dovish," said Daiwa's Ishizuki.
Elsewhere in the currency market, the dollar was 0.05% higher at 108.47 yen.
Market participants were also keeping tabs on developments around Washington's trade negotiations with both China and Mexico.
U.S. President Donald Trump said on Thursday he would decide whether to carry out his threat to hit China with tariffs on at least $300 billion in the country's goods after a G20 meeting late this month.