Foreign exchange trading reminder: the non-agricultural dollar fell slightly from a four-week high, and the pound is still subject to Bailey's remarks

The dollar index retreated from a four-week high on Thursday, with unimpressive data on the US labour market a day before a key jobs report, while Treasury yields rose but short-term bond yields fell.

The dollar index fluctuated in a narrow range on Friday (August 4) and is currently trading around 102.48. The dollar index retreated from a four-week high on Thursday, with unimpressive data on the U.S. labor market a day before the release of the key employment report. At the same time, U.S. Treasury yields rose, but short-term bond yields fell.

US non-farm productivity rose at an annualised rate of 3.7%, helping to restrain growth in labour costs and improving the outlook for US inflation. But labour productivity has grown by 1.4% since the fourth quarter of 2019, well below the long-term average of 2.1% since 1947.

Other data showed initial U.S. jobless claims rose slightly last week, while layoffs fell to their lowest level in 11 months in July amid a tight labor market.

Vassili Serebriakov, currency and macro strategist at UBS, said "the US activity data showed a lot of resilience compared to the rest of the world", adding that he did not consider the day's data "particularly impactful".

The dollar has also been helped by carry trades, in which investors borrow in low-interest-rate currencies and invest in dollars or dollar assets.

As the Federal Reserve prepares for its annual symposium to be held in Jackson Hole, Wyoming, on August 24-26, there could be signs that the central bank is nearing an end to its rate hike drive, driven by several European central banks.

Thierry Wizman, global FX and currency strategist at Macquarie, said: "Several central banks in Europe have been more explicit about interest rate peaks."

"You might think that the story of slowing inflation is more prominent in the U.S. and that the Fed should send a clearer signal about peak interest rates," he said.

The European Central Bank hinted last week that it may pause interest rate hikes at its next meeting in September as inflation continues to fall and economic growth weakens.

Measuring the dollar against six major currenciesThe dollar index hit a four-week high of 102.84 on Thursday, but then fell back to close at 102.47, down about 0.15%.

The closely watched US non-farm payrolls report will be released on Friday.

After the Bank of England raised interest rates by 25 basis points, the pound bottomed out and rebounded, because only 25 basis points, disappointing some investors who expected to raise interest rates by 50 basis points, the pound against the dollar once hit a low of nearly one month to 1.2619, but after the Bank of England Governor Bailey's speech, the exchange rate recovered most of its losses, closing at 1.2707, down about 0.02%.

John Leiper, chief investment officer at Titan Asset Management, said: "The relative divergence in future monetary policy trajectories against the backdrop of better-than-expected growth data has been the catalyst for sterling's rally this year. But momentum has waned recently, following the latest inflation data... and there are signs today that the central bank is easing in the direction it is heading."

Still, Mr. Bailey said at a news conference, "I don't think it's time to declare it all over." He added that it was "premature" to speculate on the timing of any rate cut. He added, "We may need to raise rates again, but it's not certain."

The safe-haven yen rallied 0.40 per cent against the dollar on Thursday to close at 142.51 against the yen, benefiting from risk aversion as global equities extended their recent losses after touching a four-week high of 143.88 against the yen.

The yen remained under pressure this week despite the Bank of Japan loosening its grip on interest rates on Friday, and policymakers were quick to play down speculation that the move was a prelude to the central bank's imminent exit from ultra-loose policy.

EUR/USDThursday rose 0.1% to close at 1.0948.Australian dollar to US dollarThursday bottomed out and rebounded. Earlier, it hit a two-month low of 0.6513, but ended the session higher at 0.6550, an increase of about 0.2%.

Friday Forward

institutional perspective

Bank of America: If the Federal Reserve cuts interest rates later than expected, the dollar could rise

Stubborn inflation and the market's "premature" pricing of Fed easing bodes well for the dollar, Bank of America analysts said in a note. "We continue to see upside risks [for the dollar] from pricing in premature rate cuts for the remainder of 2023," they said, adding that the dollar was expected to "move towards long-term equilibrium" by 2024. Markets are mostly betting that inflation will slow fast enough for the Fed to start cutting rates early next year, but Bank of America said a tight labour market and accommodative fiscal policy could keep inflation sticky.

ABN Amro: The European Central Bank will avoid raising interest rates for the rest of the year and start cutting rates in March next year

The ECB will avoid raising borrowing costs for the rest of the year and start cutting interest rates in March, bringing the deposit rate down to 2 per cent by the end of 2024, ABN Amro said. "The ECB's aggressive rate hikes have led to a significant tightening of financial and bank lending conditions and are just beginning to have a depressing effect on demand," said Nick Kounis, head of research at macro and financial marekt. "The full impact of the rate hikes on the economy will not become apparent until four to five quarters from now," he said. "Given the timing of the rate hikes, it means we could see a significant drag on the economy in the second half of this year and the first half of next year." Mr. Kounis also argued that core inflation "could fall more significantly in the coming months". "Given that the economy has been weak for perhaps a year, inflation is trending down strongly and unemployment is rising, it is not unusual for central banks to start easing policy restrictions," he said.

Quintet Private Bank: Bank of England inflation forecasts show more rate hikes needed

Nicolas Sopel, chief strategist at Quintet Private Bank, said the BoE's inflation forecast for 2023 remains high, well above its 2 per cent target, suggesting more rate rises are warranted this year. The BoE forecasts inflation will fall to around 5 per cent by the end of 2023 and hit its 2 per cent target by early 2025. "Despite mixed economic data and slowing growth, we believe the BoE will continue to raise rates this year, bringing rates to 6 per cent."

Wells Fargo: Productivity data points to reduced labor price pressure in the United States

Wells Fargo analysts Sarah House and Michael Pugliese pointed out in a report that stronger-than-expected productivity growth in the second quarter of the United States, coupled with slower wage growth, indicates that inflationary pressures in the labor market are starting to ease. The Bureau of Labor Statistics report showed that productivity rose 3.7% in the second quarter from Quarter 1, compared with market expectations of 2.3%. Unit labor cost growth slowed to 1.6% from a downgraded 3.3% in Quarter 1. House and Pugliese said stronger productivity growth "makes the recent pace of wage growth more acceptable in the context of the 2% inflation target."

At 08:19 Beijing time, the dollar index was trading at 102.48.