Taking stock of the dollar ahead of payrolls

The dollar has rebounded a little this week ahead of next week’s crucial US non-farm payrolls report. The incoming data this week has generally supported our view that the US is on track for a soft landing, and if we are right in thinking that payrolls growth will rebound a bit from the surprise weakness in July, the odds of a 50bp cut from the FOMC at its next policy meeting will probably recede further. Combined with continued soft data out of the euro-zone supporting the case for further ECB cuts, that may help the greenback continue to stabilise after its sharp fall in July and August. Given the extent of Fed easing that is already discounted in the money market, we think there is limited scope for further dollar weakness in the near term.