The dollar declined against major peers on Friday, trimming gains made this week as bond markets stabilised and traders awaited key US jobs data expected to firm up the case for an interest rate cut by the Federal Reserve.
Data on Thursday showing higher-than-expected applications for jobless benefits in the US served as a prelude to the more critical nonfarm payrolls report. Bonds rallied in the US, Europe and Japan after fiscal concerns spurred a run-up in long-term yields, while the S&P 500 hit a new all-time high.
"It seems to me that the reaction to the ADP yesterday was a bit too muted," said Francesco Pesole, FX strategist at ING.
"All in all, it is pointing to a probably weak payroll figure today. I was a little surprised to see the dollar holding up yesterday."
He said dollar weakness in early European trading on Friday could be indicative of traders offloading the greenback ahead of the US job figures at 8:30 a.m. ET (1230 GMT).
On Friday, the dollar index, which tracks the greenback against a basket of currencies of other major trading partners, dipped 0.2% to 98.018, trimming its gain for the week to 0.2%, Reuters reported.
The dollar dropped 0.2% to 148.14 yen. The euro was up 0.3% on the day at $1.16845.
In the UK, sterling was last up 0.3% at $1.34720, while versus the euro, the pound was unchanged at 86.70 pence.
The pound held steady after Friday's news that British Deputy Prime Minister Angela Rayner resigned after admitting to underpaying property tax on a new home, in a fresh blow for her boss, Prime Minister Keir Starmer.
British finance minister Rachel Reeves will stay in her role despite an expected wider government reshuffle, BBC News reported on Friday following Rayner's resignation.
Earlier, UK retail sales data for July came in hot but also failed to move the dial on sterling.
Focus remains on the dollar and the Fed's likely trajectory on interest rates. US President Donald Trump's meddling with Fed policy and his unpredictable tariff regime has made investors shy about holding dollar assets of late, said Bart Wakabayashi, the Tokyo Branch Manager of State Street.
"The dollar remains very, very underweight," Wakabayashi said. "I do think there is room for the dollar buying to come back at some point. Maybe investors are just waiting for the rate cut to happen and then pile back in."
Several Fed officials said labour market worries continue to support their calls for rate cuts, boosting expectations of an imminent easing. The Fed is due to convene on September 16-17.
The Labor Department's Bureau of Labor Statistics (BLS) will report US nonfarm payrolls for August, with economists surveyed by Reuters expecting an increase of 75,000 jobs after a gain of 73,000 in July.
That follows figures on Thursday showing that US private payrolls rose by less than expected in August and jobless claims in the final week of the month were higher than predicted.
"The risk is still tilted to payrolls underperforming US economists' expectations that will weigh on the USD tonight," Joseph Capurso, head of international economics at the Commonwealth Bank of Australia, wrote in a note.
Traders are pricing in a near-100% chance of the Fed cutting interest rates later this month, up from 87% a week ago, CME FedWatch showed.
Michael Brown, senior research strategist at Pepperstone, said that Friday's jobs report doesn't really matter in the grand scheme of things.
"The Fed will be delivering a 25-bp cut at the September meeting. A hot report shan't dissuade them from doing so, given the broader trend of softening jobs data. A cool report shan't convince them to plump for a larger rate reduction, given lingering upside inflation risks," he wrote in a note.
Trump signed an order on Thursday to implement lower tariffs on Japanese automobile imports and other products that were announced in July. Japan also confirmed its commitment to an annual $7 billion worth of energy purchases from the US, a joint statement from the countries showed.
The Australian dollar rose 0.4% to $0.6544. The New Zealand dollar rose 0.6% to $0.58785.
