Dollar hovers near five-week low on Fed rate cut bets

By Kevin Buckland

TOKYO, Dec 5 (Reuters) - The U.S. dollar languished not far from a five-week low against its major peers on Friday as investors braced for a Federal Reserve rate cut next week.

Markets widely expect a quarter point reduction when the policy-setting Federal Open Market Committee meets on December 9-10, and a focus will be on any signals about how much additional easing lies ahead. 

The dollar index, which measures the currency against six rivals, was flat at 99.065 early in Asia. A small gain overnight snapped a nine-day losing streak, but the index had dipped to a five-week low of 98.765 earlier that session, and it remains on course for a 0.4% decline this week.

Traders are pricing around 86% odds of Fed cut next Wednesday, and potentially 2-3 more reductions next year, LSEG data showed.

Fed officials have been carefully watching the labour market to determine whether the economy needs further support. 

Data overnight showed the number of Americans filing new applications for unemployment benefits fell to a more than three-year low last week, but may have been skewed by the Thanksgiving holiday.

The data picture remains incomplete following the record-long government shutdown delayed some releases and prevented other data from ever being collected.

Crucial monthly payrolls figures would ordinarily be published later on Friday, but have been delayed, and the previous month's numbers were never released.

However, one of the Fed's preferred inflation gauges - the PCE deflator - will be published later on Friday, although the data is for September. Economists surveyed by LSEG expect a 0.2% monthly increase in the core number.

"An increase of 0.2% per month or below will encourage the FOMC to cut the Funds rate next week in our view," Commonwealth Bank of Australia currency strategist Carol Kong wrote in a client note.

"Our analysis suggests the risk is a soft increase in core PCE inflation of only 0.1%." 

The dollar was little changed at 155.18 yen.

The euro was flat at $1.1647 and sterling held steady at $1.3326 after easing back from Wednesday's six-week peak in the previous session.

The dollar has come under additional pressure in recent days with investors also weighing the prospect of White House economic adviser Kevin Hassett taking over as Fed Chair after Jerome Powell’s term ends in May. Hassett is expected to push for more rate cuts.

Next week sees a parade of central bank policy decisions, with the Reserve Bank of Australia's coming on Tuesday, the Bank of Canada's on Wednesday and the Swiss National Bank's on Thursday.

That continues the following week with the European Central Bank, the Bank of England, Sweden's Riksbank, and the Bank of Japan setting policy.

Three government officials told Reuters that the BOJ is likely to raise rates this month, although what comes after remains uncertain, with markets only fully pricing in one more rate hike next year and around a 50% chance of another.

The Aussie was stable at $0.6609 after jumping to a two-month high of $0.6624 on Thursday.

Canada's loonie was little changed at C$1.3961 per greenback, while the Swiss franc was steady at 0.8035 per dollar after dropping back sharply from Wednesday's two-week high of 0.7992 in the overnight session.

(Reporting by Kevin Buckland; Editing by Stephen Coates)