Dollar dips before U.S. jobs data; eyes on Italy's vote

[December 02, 2016]  By Patrick Graham

LONDON (Reuters) - The dollar was on course for its first weekly fall in four weeks against a basket of currencies on Friday after investors trimmed some bets against the euro on the run up to U.S. jobs data and Italy's constitutional referendum.

Positions on the euro have largely been taken on options markets this week, driving implied volatility of the currency - which could pay off for speculators in either direction - to its highest since Britain's June vote to leave the European Union. <EURSWO=>

But spot rates for the single currency have held up as the U.S. currency drifted lower, a move that most analysts cast as a short-term correction to the dollar's surge since Donald Trump won the U.S. presidential election on Nov. 8.

Most banks have forecast a broadly stronger dollar next year.

"We're in a period of consolidation. We saw this in October, we spent the whole month rising and then we had a week of sideways trading," said Neil Mellor, a strategist at BNY Mellon in London.

"I don't think we need to overcomplicate things today. You have the Friday factor, there is always a degree of reserve before payrolls. It does also feel as if liquidity is already falling ahead of the end of the year. Some people may be sitting back and waiting for January."

In morning trade in Europe, the dollar index dipped 0.1 percent to 100.86 <.DXY>, down 0.6 percent for the week. It was marginally higher against the euro while pulling back from Thursday's 9-1/2-month highs of 114.83 yen. <JPY=>

The logic behind the dollar's gains has been broadly about another rise in U.S. Federal Reserve interest rates later this month raising the premium for holding dollars.

That now looks fully priced in, however, and some have argued the dollar may struggle for momentum until there is more clarity on Trump's economic policy proposals and their ability to raise inflation rates and in turn drive rates higher.

There is also growing speculation that the ECB could include some sort of tapering of bond purchases in the reordering of its quantitative easing program set to be announced next month.

A man walks past a currency exchange bureau advertisement showing an image of the U.S. dollar in Cairo, Egypt, November 11, 2016. REUTERS/Mohamed Abd El Ghany

Economists polled by Reuters expect that U.S. employers added 175,000 jobs in November, although a poorer batch of weekly jobs figures on Thursday hinted at a weaker number.

The focus for the euro now is on an Italian referendum on Sunday that could reject constitutional reforms on which Prime Minister Matteo Renzi has staked his political future.

Renzi's departure could destabilize Italy's fragile banking system and be taken as another sign of rising anti-establishment sentiment around the world, potentially eroding investor confidence in the currency union.

"High-frequency accounts and leveraged specs (speculative traders) have been reported on the bid, though there are plenty of offers ready to cap overdone rallies," analysts from currencies exchange LMAX said in a morning note.

"There is sure to be plenty of volatility in Asia on Monday as the result of the Italian referendum comes in."

(Additional reporting by Shinichi Saoshiro in Tokyo; editing by Susan Thomas)

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