The dollar fell to a one-month low against the yen and was under pressure against other major currencies on Thursday as growing concern over the U.S. economic outlook underpinned expectations of a supersized rate cut from the Federal Reserve next week.
The yen touched a one-month high earlier in the day, in part due to safe-haven demand, but also on the view that imminent rate hikes from the Bank of Japan, while other central banks cut rates, could lift the Japanese currency due to narrowing interest rate differentials.
Global markets have been on edge and stocks, in particular, have been badly bruised after softer-than-expected U.S. data this week reignited concerns that the growth outlook of the world's largest economy was less rosy than earlier thought and the labour market could be slowing more sharply than expected.
Ahead of Friday's all-important U.S. nonfarm payrolls report are readings on private-sector employment, weekly unemployment claims and service-sector activity, all of which could stir up some volatility, City Index market strategist Fiona Cincotta said.
"A lot are going to be on the sidelines for what we’re going to be seeing tomorrow. The data has the potential to either confirm or refute these recession fears that we’ve seen hovering over the market since the July (jobs) report," she said.
"Sometimes when the market is that nervous about a reading, that’s when we often see a very, very big knee-jerk reaction which is probably what we’ll see on Friday before we see a more settled response to the data next week."
The options market shows traders are preparing for potentially big moves in currencies on Friday. Overnight implied options volatility - a measure of demand for protection - is at its highest since the banking crisis of March 2023 for the euro and at its highest in a year for the yen.
Some of this is a function of the large fluctuations in stocks, bonds, currencies and commodities this week.
The latest trigger for investor nerves was data on Wednesday that showed U.S. job openings dropped to a 3-1/2-year low in July, suggesting the labour market was losing steam, with the figures coming after Tuesday's ISM manufacturing survey which remained in contraction territory.
"Job openings data for July showed few signs of the ongoing cooling in the labor market coming to an end," said economists at Wells Fargo in a note. "For the Fed, (the) data reaffirm that the labor market is no longer a source of inflationary pressure to the U.S. economy."
The U.S. dollar was nursing some of its losses from the previous session on Thursday as traders ramped up bets of an aggressive Fed easing cycle expected to commence this month.
Against a basket of currencies, the dollar held steady at 101.23.
The euro edged up 0.1% to $1.10928, as did sterling, which traded at $1.3155.
The Australian dollar fell 0.1% to $0.6722, but was some distance away from an over two-week low hit on Wednesday as it drew support from a still-hawkish Reserve Bank of Australia.
Traders now see a 45% chance of the Fed cutting rates by 50 basis points when it meets this month, and have priced in more than 100 bps worth of cuts by the end of the year.
The determining factor could be Friday's nonfarm payrolls report, which is expected to show the U.S. economy added 160,000 jobs in August, compared with July's 114,000 increase. The unemployment rate is forecast to ease slightly to 4.2%.
