Movements in the yen dominated the Asian and European sessions on Friday. After suffering its biggest one-day fall for over two years on Thursday, the dollar remained generally on the defensive despite a brief rally to above 97 against the Japanese currency.
There was further disappointment surrounding Japanese economic measures with the Japanese pension fund GPIF only increasing the benchmark allocation of domestic stocks to 12% in fund portfolios from 11% now. This change suggested only very limited scope for equity buying given the shift that has already taken place and the Nikkei index was subjected to further selling. In response, the dollar also weakened with a test of two-month lows below 95.50.
The Euro was confined to relatively narrow ranges with the moves tending to concentre on yen gains rather than wider dollar vulnerability as EUR/USD held near 1.3250.
Trading ranges were generally very narrow ahead of the US open as caution prevailed ahead of the pivotal monthly payroll report. There were some media reports that the Federal Reserve would consider a tapering of bond purchases even if monthly employment growth failed to reach the 200,000 level which helped curb further aggressive dollar selling.
In the event, the headline payroll report was slightly stronger than expected with an employment increase of 175,000 for May compared with estimates around 165,000. There was a slight downward revision to April’s data and the unemployment rate also edged higher to 7.6% from 7.5% previously. There was also a small decline in manufacturing employment for the month.
The underlying tone, however, was certainly one of relief given that market expectations surrounding the release had deteriorated significantly over the past few days. While not resolving questions surrounding the timing of any Fed bond-purchase tapering, the data maintained the possibility of action which helped underpin the dollar. The US currency also gained net support from renewed vulnerability in emerging-market currencies as the Indian rupee, for example, dipped towards 12-month lows.
Trading conditions were inevitably extremely erratic following the payroll release with another surge in volatility surrounding the yen. The dollar briefly dipped to lows in the 95 area immediately after the release, but quickly found traction and moved back above 97.50 ahead of the European close.
Although movements in the other major currencies were less extreme, the pattern was broadly the same with the dollar regaining some ground. From a high above 1.3280, EUR/USD retreated to test support below 1.32 while GBP/USD dipped to lows below 1.55. The dollar still found it difficult to sustain gains with the weight of long position liquidation still an important restraining factor.