Dollar softens, China's yuan draws support from stimulus hopes

Greenback was down nearly 1pc against a basket of currencies on Friday

SINGAPORE (Reuters) – The dollar was on the defensive on Monday as investors scaled back expectations over how much further US interest rates would rise after US jobs data showed the smallest increase in 2-1/2 years.

The US economy added 209,000 jobs last month, data on Friday showed, missing market expectations for the first time in 15 months.

That caused US Treasury yields to slump and sent the dollar down nearly 1 per cent against a basket of currencies on Friday while the yen and sterling surged.

The Japanese yen was last more than 0.2pc lower at 142.45 per dollar in early Asia trade, giving up some of its 1.4pc gain from Friday.

The dollar/yen pair is particularly sensitive to US yields as interest rates in Japan are anchored near zero.

"I suspect you got a market that was going into (the payrolls) high on expectations ... so with that in mind, people pared back some of those dollar longs," said Chris Weston, head of research at Pepperstone.

"We've also seen large inflows back into the yen as well, we've seen some people looking to cover some of those yen shorts."

The British pound firmed near an over one-year peak of $1.2850 hit on Friday and last traded $1.28325, as bets grow that stubborn inflation in the UK will force the Bank of England to raise interest rates to a 25-year high of 6.5pc by December.

The euro dipped 0.07pc to $1.0962, after having risen 0.7pc on Friday, while the US dollar index rose 0.06pc to 102.36 but remained not far from Friday's two-week low of 102.22.

"I certainly don't trust that US dollar move...whether it's sustained," said Weston. "But it’s sort of screams out that the market obviously sees the Fed in the later stage of the (monetary tightening) cycle."

In Asia, data out on Monday showed China's factory gate deflation deepened in June and missed expectations, while consumer prices were unchanged, as the post-COVID recovery faltered.

The market reaction to the data was largely muted, as it fuelled hopes that Chinese authorities would soon unveil further stimulus measures for the economy.

As a result, the offshore yuan and the Australian dollar - regarded as a liquid proxy for the yuan in international markets because China is the biggest buyer of Australian exports - only eased slightly after the data came out.

The offshore yuan last traded at 7.2290 per dollar, while the Aussie fell 0.14pc to $0.6683.

"The softer CPI is still reflecting weak domestic demand while PPI deflation underscores the strains on factories," said OCBC currency strategist Christopher Wong.

"(It's) basically saying that China needs stimulus support."

Elsewhere, the New Zealand dollar dipped 0.12pc to $0.62015.