Dollar gains before US jobs report, Fed's Warsh sees improving inflation

By Karen Brettell

NEW YORK, July 1 (Reuters) - The dollar gained ahead of a closely watched U.S. jobs report due on Thursday, but pared its earlier increase after Federal Reserve Chair Kevin Warsh said that inflation expectations and inflation risks have eased in recent weeks. 

The Japanese yen, which had earlier slumped to a 40-year low against the greenback, rebounded as the dollar faded.

Warsh, speaking at an international panel, said that he will stick firmly to the U.S. central bank's 2% inflation target. He also set an ambitious timeline for the U.S. central bank to "discover" and start relying on real-time economic data that's superior to what he described as problematic government reports.

Asked if he thought artificial intelligence might for now at least be inflationary, Warsh responded generically that it was up to the central bank to ensure it is not, rather than untangle how some aspects of AI might strain available resources even if it ultimately raises productivity.

The dollar has been underpinned by rising expectations of Fed rate hikes this year, as inflation runs well above the central bank's 2% annual target. Still, many analysts believe the inflation picture will improve in the months ahead.

“Nothing that we see suggests that any imbalance either on the activity side or the inflation side is growing rapidly,” said Steve Englander, head of global G10 FX research and North America macro strategy at Standard Chartered Bank’s New York branch.

“You can afford to wait and see how these longer-term technological trends play out,” Englander added. “What we do see is that unit labor costs are very, very soft, and ultimately that's what the Fed controls.”

Even absent a more hawkish Fed stance, other forces are drawing capital to the United States and supporting the dollar, including the rapid adoption of AI. 

A resilient labor market, which has produced far stronger job gains than expected for the past three months, has also bolstered the outlook for U.S. growth.

Thursday's data is expected to show U.S. employers added 110,000 jobs in June, with the unemployment rate holding steady at 4.3%, according to the median estimate of economists polled by Reuters.

The ADP National Employment Report on Wednesday showed that private employment rose by 98,000 jobs last month, below economists' forecasts for 118,000 job gains.

Fed funds futures traders are pricing in 66% odds of a Fed rate hike by September.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was last up 0.17% at 101.41.

YEN BEARS THE BRUNT OF DOLLAR STRENGTH

The Japanese yen has been one of the biggest casualties of the dollar's strength, putting Japan's Ministry of Finance in a difficult position over whether to intervene to support the currency.  

Japan's top currency diplomat, Atsushi Mimura, said intervention two months ago to support the yen had been effective, and that some U.S. officials had been "supportive" of the move, Bloomberg News reported on Wednesday.

Joey Chew, head of Asia FX at HSBC, said Japan's Ministry of Finance appeared more tolerant of yen weakness than in the past. Factors include broad-based dollar strength against major currencies and falling oil prices, which have eased pressure on the Bank of Japan to curb inflation.

She said the ministry could also be waiting for a downside surprise in Thursday's U.S. jobs report that might weaken the dollar, or could be "baiting speculative yen positioning to build to even more extreme levels so as to enhance the impact of its intervention."

Traders see Friday's U.S. public holiday as a potential window for Tokyo to step in, with thinner liquidity likely to amplify the effect of any move.

However, intervening during light liquidity “if anything, shows weakness rather than strength,” said Englander, adding that “most of the market doesn't think it's going to last.”

“The government has made it clear it doesn't want the (Bank of Japan) hiking very fast. The BOJ doesn't sound like it's in a hurry. The Japanese economy is maybe doing a little bit better than expected, but not enough to change anybody's view,” Englander said.

The Japanese yen was little changed against the greenback at 162.56 per dollar. 

The euro fell 0.39% to $1.1376.

Data earlier showed that euro zone inflation fell more than expected in June to below 3%, removing some of the pressure on the European Central Bank to raise interest rates.

In cryptocurrencies, bitcoin gained 2.44% to $60,096, after earlier dropping to $57,776, the lowest since September 2024.   

(Reporting by Karen Brettell; Additional reporting by Rae Wee and Amanda Cooper; Editing by Sharon Singleton and Nick Zieminski)