US dollar on track for best month in 4-1/2 years; payrolls in focus

NEW YORK/LONDON: The dollar gained on Wednesday, headed for its biggest monthly rise since November 2016, supported overall by a surprisingly hawkish shift in the U.S. Federal Reserve's rates outlook at a meeting early this month, as well as concern over the spread of the Delta coronavirus variant.

The dollar has gained about 2.6per cent against a basket of currencies this month, partly in the wake of the Fed stance. Traders are looking to Friday's U.S. nonfarm payrolls report for a likely confirmation of a shift in monetary policy.

The greenback also edged higher after data showed U.S. private payrolls increased more than expected in June by 692,000 jobs. Data for May though was revised lower to show 886,000 jobs added instead of the initially reported 978,000. Economists polled by Reuters had forecast private payrolls would increase by 600,000 jobs.

"The strong dollar narrative has taken over for the short term," said Erik Nelson, macro strategist, at Wells Fargo Securities in New York.

"If we see the U.S. employment number come out stronger than expected, then this reinforces the narrative that the Fed may remove accommodation faster than previously expected. That's going to be dollar-positive," he added.

The U.S. Labor Department is expected to report a gain of 690,000 jobs in June, compared with 559,000 in May, and an unemployment rate of 5.7per cent versus 5.8per cent in the previous month, according to a Reuters poll of economists.

Investors were also apprehensive about the spread of the Delta variant that has prompted some countries such as Australia, the UK, and parts of Europe to undertake or plan renewed lockdowns, causing their currencies to struggle. That has put a bid on the U.S. dollar.

In midmorning trading, the dollar index, which measures the greenback against a basket of six major currencies, rose 0.3per cent per cent to 92.319 after earlier touching a more than one-week high of 92.324.

For the first half of the year, the dollar climbed 2.5per cent, the best half-year performance since August 2019.

Title: Dollar heads for best month gain since November 2016, https://fingfx.thomsonreuters.com/gfx/mkt/oakpedmxnvr/DXY.png

The euro was down 0.2per cent against the dollar at US$1.1896. Against the yen, the dollar was firmer at 110.71 yen.

Risk-sensitive and commodity-exposed currencies such as Australian and New Zealand dollars nursed losses against the greenback. The Aussie and New Zealand dollars were down 0.2per cent at USUS$0.7502 and USUS$0.6983 respectively.

Paul Mackel, global head of FX research at HSBC, said currency markets seemed to be in transition from closely tracking the ebb and flow of risk sentiment toward a greater sensitivity to interest rates, driving a shakeout that has lifted the dollar.

"There's been a lot of speculative buildup of short dollar positions over the last couple of months and we think that these are being washed out," Mackel told reporters, speaking during an outlook call.

Indeed, data showed the sharpest fall in the value of bets against the dollar in three months occurred last week, a boost for the greenback as the shorts buy dollars to close positions.

(Reporting by Gertrude Chavez-Dreyfuss in New York and Ritvik Carvalho in London; Editing by Andrew Heavens, Chizu Nomiyama and Jonathan Oatis)