Dollar strengthens as traders await return of U.S. data

By Laura Matthews

NEW YORK (Reuters) -The dollar strengthened against the euro and the yen on Monday as traders exercised caution ahead of what could be a busy week with the long-awaited return of U.S. economic data.

Market reaction to U.S. President Donald Trump's tariff U-turn on more than 200 food products was muted, with some analysts saying the move was not a surprise due to the cost-of-living issues caused by the levies.

A flood of data that was delayed during the federal government shutdown is due to be released starting this week, and it is expected to provide clues on the health of the world's largest economy, with the closely watched September nonfarm payrolls report due on Thursday.

"With the government shutdown behind us for now, markets are turning to the upcoming Fed minutes and labor data for clues on the December decision. Pricing for a December cut has essentially become a coin flip," said Uto Shinohara, senior investment strategist at Mesirow Currency Management.

"Inflation still feels sticky despite the lack of fresh data, while the labor picture appears to be softening. Thursday’s release will help, but it reflects September conditions, making it both stale and potentially emotionally charged if the headline number is large."

Despite signs of further weakness in the U.S. economy from recent private-sector data, investors have trimmed expectations of a Fed cut next month, betting that gaps in economic data will delay or even derail further easing.

Markets are now pricing in less than a 40% chance of a 25-basis-point rate cut in December, down from more than 60% earlier this month.

Meanwhile, Federal Reserve Vice Chair Philip Jefferson said on Monday, the U.S. central bank needs to "proceed slowly" with further rate cuts, denting expectations for a decrease next month. 

Goldman Sachs currency analysts cautioned in their week-ahead note that the delayed data coming out soon will be of limited value, and the upcoming payrolls data is unlikely to settle debates about the outlook.

In the medium term however, the analysts think economic data will "show enough downside risks to the labor market to settle the swirling debate within the FOMC," the Fed's rate-setting committee, something that will be negative for the dollar.

Joseph Trevisani, senior analyst, FX Street, said the market needed meaningful new information to chart direction. "Until we get something like that, I don’t think you’re going to get a lot of movement." 

For now the market remains range-bound. The euro was down 0.31% on the dollar at $1.1585, while the yen fell 0.44% to 155.2 to the U.S. currency. 

YEN WATCH 

The yen hardly reacted to data on Monday that showed Japan's economy shrank an annualized 1.8% in the three months through September, as a drop in exports in the face of U.S. tariffs resulted in the first contraction in six quarters.

The Japanese currency remained near a nine-month low against the dollar, leaving traders alert to the threat of intervention from Japanese authorities to stem the yen's decline.

Japan last intervened in the currency market in July 2024 when the yen fell to a 38-year low of around 161.96 to the dollar, as currency weakness stoked sharp food and fuel price inflation.

The dollar index, which measures the greenback against a basket of currencies, was last up 0.25% on the day at 99.57.

Meanwhile, sterling slipped 0.19% on the dollar to $1.3150. British assets saw a whirlwind Friday session as speculation swirled around the UK government's highly anticipated November 26 budget.

This speculation is likely to continue, though the pound will also be influenced by British economic data this week, most notably monthly inflation data. 

The safe-haven Swiss franc pulled back from a one-month high and last stood at 0.7962 per dollar, having found support last week from jitters over an ugly selloff in global stock markets.

(Reporting by Laura Matthews in New York; Additional reporting by Alun John in London and Rae Wee; Editing by William Maclean, Andrew Heavens, Gareth Jones and Cynthia Osterman)