The greenback rallied on Wednesday after hitting two-month lows the day before as investors waited for the release of the U.S. non-farm job report.
In the afternoon, the dollar index advanced 0.4 percent to 101.87. The currency's gain over the euro became a major boost for the index, with the euro trading 0.5 percent lower to $1.0906.
The Australian dollar weakened against the greenback, falling by 0.5 percent to $0.6720. The Aussie's fall happened a day after the Reserve Bank of Australia decided to pause rate hikes, maintaining its benchmark rate at 3.6 percent. The central bank reasoned it needed to assess the impact of the previous ten consecutive hikes.
The greenback traded sideways against the Swiss franc but posted its third-straight loss against the Japanese yen, falling by 0.4 percent to 131.15 yen per dollar. It also weakened slightly against the New Zealand dollar, with the Kiwi rising by 0.1 percent to $0.6316. The New Zealand currency rallied after the country's central bank raised its interest rate by 50 basis points to 5.25 percent, the highest in over a decade.
Analysts said the expectations on the Federal Reserve's rate policy had influenced the dollar movement lately. Futures tied to Fed's policy predicted a 55 percent probability of the U.S. central bank maintaining its current rate, up from a 43 percent probability from the day before. The market also projected 85-basis-point rate cuts by the end of 2023.
The non-farm job report due this Friday will further influence the Fed's policy, said analysts. The ADP National Employment report published Wednesday revealed that the U.S. private entities hired fewer workers than expected last month, indicating a cooling U.S. job market. Private employment rose by 145,000 jobs in March, significantly lower than economists' previous forecast of a 200,000 increase.
Before the private employment report, the U.S. Labor Department said Tuesday that job openings in February declined from the month before. The cooling job market is expected to motivate the Fed to loosen its tight monetary policy since a robust employment market has been one of the central bank's main concerns in the last few months.
A strong job market can drive wage inflation, leading to higher consumer prices. The U.S. job market remained robust in the past months despite the Fed's consecutive interest rate hikes. The unemployment rate even went to the lowest level in several decades last January.
Another inflation indicator, ISM's non-manufacturing index, also indicated that the Fed's policy had begun to slow down the economy. The index fell to 51.2 in March after posting 55.1 in the previous month, showing that services firms experienced declining business activities.
"There is plenty of evidence in the pipeline showing that disinflation is the underlying trend…and part of the basis as to why the Fed is sounding ambiguous these days."
Thierry Wizman, Global FX and Rate Strategist at Macquarie
Macquarie global FX and rates strategist Thierry Wizman said the recent signs of disinflation caused the Fed to be "ambiguous" in communicating its policy in recent days.
Dollar to continue downward trend
Erik F. Nelson, a macro strategist at Wells Fargo's London office, said the U.S. dollar would likely continue its downward trend. He added that the greenback tracked the movement of the U.S. Treasury yields, which showed volatility in recent weeks.
"We need to see continued weakness in the data because part of the dollar weakness we're seeing is coming from falling U.S. rates and cuts being priced from the Fed," Nelson said. "And if the U.S. data is not going to affirm that, then the dollar could be more resilient than expected."
Despite the bearish trend of the dollar, Nelson predicted that its movement would be more of a "grind lower" instead of a sharp plunge.