At the outset of a busy macroeconomic week, the U.S. dollar traded lower, while the Japanese yen received support from renewed talk of official market intervention.
At 06:30 ET (11:30 GMT), the Dollar Index - which measures the greenback against a basket of six currencies - was down 0.3% at 97.220, reversing the gains seen last week. The pullback comes as market participants position ahead of a slate of high-profile U.S. releases, including retail sales, inflation data and a delayed jobs report.
Analysts at ING highlighted the sensitivity of markets to recent labor data, noting that "U.S. labor market data surprised on the downside last week, and markets are now bracing for the Federal Reserve to potentially re-appraise its view of the jobs market." The spotlight is particularly intense on Wednesday's January payrolls report and its associated benchmark revisions. "Consensus expects a decent +70k increase, but the market will be more sensitive to a downside miss," ING added.
Monetary policy expectations remain tentative: the Federal Reserve is scheduled to meet in March, yet Fed funds futures imply only about a 15% probability of a 25-basis-point cut at that meeting. Market-implied odds for a rate reduction rise substantially for June - a meeting that would, if the nomination is confirmed, be the first with Kevin Warsh as chair of the Fed.
Adding to the dollar's headwinds on Monday was a Bloomberg News report indicating that Chinese regulators have advised financial institutions to curb their exposure to U.S. Treasuries, a development market participants treated as supportive for non-dollar assets.
European and British moves
In Europe, the euro advanced, with EUR/USD trading 0.4% higher at 1.1860, helped in part by the Bloomberg report on Chinese Treasury positioning. As ING put it, "Europe offers the best alternative in terms of depth and liquidity to the U.S. Treasury market." The bank cautioned, however, that long positioning in EUR/USD remains elevated. "Stretched long positioning does look like the main barrier to a further EUR/USD advance," ING said, noting that leverage fund net long positions are again approaching cyclical highs and that the short-term bias looks toward 1.1900.
GBP/USD was largely unchanged at 1.3611 as sterling failed to pick up momentum from dollar weakness amid fresh political pressure in London. British Prime Minister Keir Starmer's chief of staff resigned, taking responsibility for advising Starmer to appoint Peter Mandelson as ambassador to the U.S. despite Mandelson's known links to the late Jeffrey Epstein. ING warned, "Expect pressure to remain on both sterling and Gilts as the market speculates over a change of personnel at numbers 10 and 11 Downing Street."
Asia-Pacific: yen gains, yuan steadies, aussie edges higher
In Asia, the yen strengthened after officials renewed warnings about intervening to support the currency. USD/JPY fell 0.3% to 156.69, after earlier touching a roughly 0.5% intraday decline. Japanese authorities' comments echoed concern over the yen's historically weak levels versus the dollar. Finance Minister Satsuki Katayama was reported to be in close coordination with U.S. Treasury officials over a potential joint operation, offering the yen temporary respite.
The yen's improvement followed a landslide victory for Prime Minister Sanae Takaichi in the lower house election, which delivered her ruling coalition a supermajority and cleared the way for major fiscal spending proposals. That fiscal outlook is one factor market participants are weighing for the currency's longer-term path.
Elsewhere in the region, USD/CNY edged 0.2% lower to 6.9242, remaining close to levels last seen in mid-2023. The yuan has firmed noticeably in recent months amid continued support from the People's Bank of China, which has set a series of aggressively strong midpoints for the currency. Chinese CPI data due on Friday is another potential market cue ahead of Lunar New Year holidays.
AUD/USD climbed 0.1% to 0.7020, moving back above the 0.70 threshold as markets price in further interest-rate increases from the Reserve Bank of Australia. The RBA raised rates by 25 basis points last week and signaled a hawkish outlook in the face of persistent inflation.
Implications for markets
The dollar's weakness ahead of key U.S. releases highlights how sensitive currency markets remain to labor and inflation data that could alter Federal Reserve deliberations. At the same time, political developments in the U.K. and Japan, as well as policy signals from China and Australia, are shaping flows across major pairs.
With several central bank decisions and high-frequency economic releases on the calendar, traders are likely to remain reactive to incoming data, positioning adjustments and official comments in the days ahead.