Dollar in doldrums as heads for worst week since 2009

[February 05, 2016]  By Jemima Kelly

LONDON (Reuters) - The dollar traded close to a 2-1/2-month low on Friday and was on track for its heaviest weekly fall since 2009, as investors eyed U.S. employment data for justification of the view that the Federal Reserve will not raise rates in 2016.

The dollar has shed around 3 percent against a basket of major currencies <.DXY> since Monday as expectations that the Fed would raise interest rates at least once this year have all but evaporated amid signs of domestic weakness and broader concerns over global growth.

It steadied on Friday, along with most major currencies, as markets held fire before the non-farm payrolls report - usually the most closely watched number in the monthly data calendar <ECONUS> - due at 8.30 a.m. ET.

Weak U.S. economic data, as well as dovish comments from New York Federal Reserve President William Dudley, have driven the paring-back in bets on a steady pace of Fed rate increases. Fed funds futures contracts suggest traders are pricing in just a 10 percent chance of a hike next month and around a 40 percent chance by the end of the year, according to CME FedWatch.

The dollar index was roughly flat at 96.635 by 6.30 a.m. ET, having traded as low as 96.239 on Thursday, its weakest since late October.

"There isn't an awful lot of direction, which is typically the case going into payrolls, of course," said RBC Capital Markets' global head of currency strategy in London, Adam Cole.

"And I think having seen such a huge derating of Fed rate hike expectations this week, it's hard to overstate how important this release is."

The report is expected to show employers added 190,000 jobs in January, but figures on Thursday showed U.S. jobless claims rising more than expected, suggesting labor conditions could be weaker than many believe.

Commerzbank currency strategist Thulan Nguyen, in Frankfurt, said a weak report would be unlikely to drive the dollar down much further as it had already fallen so much in recent days.

"There is a general scepticism towards a proper rate hike cycle by the Fed – that's been driving down the dollar (but)there's probably not that much room left for dollar weakness," she said. "A better labor market report could bring back some confidence in the rate cycle."

The euro edged down 0.1 percent <EUR=> to $1.1199, but for the week was on track to rise more than 3 percent - its biggest weekly gain since October 2011.

That was despite European Central Bank chief Mario Draghi saying on Thursday that the risk of acting too late on ultra-low inflation was greater than that of acting too early, suggesting more policy easing may be needed.

Against the yen, the dollar traded flat at 116.80 yen, close to a two-week low of 116.525 <JPY=> and having erased an upward spike triggered a week ago by the Bank of Japan's move to adopt negative interest rates.

(Editing by Toby Chopra)

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