Dollar hovers near seven-month lows after jobs data

The U.S. dollar on Monday neared its lowest point in seven months against other major currencies after data suggested the Federal Reserve could slow the pace of its rate hikes, while China reopening its borders boosted riskier currencies.

China's offshore yuan neared its highest in five months against the U.S. dollar, while the Australian and New Zealand dollars - generally regarded as more liquid proxies for the Chinese currency - rallied sharply.

The dollar posted its biggest quarterly loss in 12 years in the last three months of 2022, driven mainly by investors' belief that the Fed won't raise rates beyond 5%, from its current range of 4.25%-4.50%, as inflation and growth cool.

Two separate reports on Friday painted a picture of an economy that is growing and adding jobs, but where overall activity is tilting into recession territory, prompting traders to sell the dollar against a range of currencies.

Friday's monthly employment report showed an increase in the number of workers on non-farm payrolls, and a slowing in wage growth - welcome news for the U.S. central bank.

A separate report from the Institute for Supply Management showed activity in the service sector contracted for the first time in 2-1/2 years in December. The ISM's non-manufacturing PMI came in at 49.6, its weakest since 2009, excluding the collapse during the coronavirus pandemic in 2020.

"Where that number came in - marginally below the 50 breakeven level - is just about as negative as you can get for the dollar," RBC head of currency strategy Adam Cole said.

"If it were another 5 percentage points lower, then that would be obviously deep recession territory, which, historically, has generally been associated with a stronger dollar against everything other than the yen and the Swiss franc."

But, with consumer inflation data due later this week, it's the outlook for price pressures that is still front and centre for investors.

"This week's U.S. CPI numbers for December on Wednesday are set to be the next waypoint for speculation as to where the terminal rate is likely to be, with a further slowdown in the pace of price rises expected, with the main focus set to be on what core prices are doing, and less on the headline numbers which are expected to continue to fall sharply," CMC chief markets strategist Michael Hewson said.

The Fed raised interest rates by 50 basis points last month after delivering four consecutive 75-basis-point hikes last year, but said it was likely to keep interest rates higher for longer to tame inflation.

Fed fund futures now show investors believe the most likely outcome for the Fed's February meeting is for a 25-basis- point increase.

The dollar index, which measures the greenback against six major currencies, was last down 0.2% at 103.54, having fallen 1.15% on Friday as investors shifted into riskier assets.

Sterling rose 0.42% to $1.2144, building on Friday's 1.5% rally. The euro rose 0.4% to $1.0687, adding to Friday's 1.17% increase.

The Japanese yen was the outlier among the major currencies, easing 0.1% to 132.20 per dollar.

Meanwhile, China continued to dismantle much of its strict zero-COVID rules around movement as it reopened its borders.

Optimism about a swift economic recovery sent China's offshore yuan towards five-month highs against the dollar on Monday.

The Australian dollar rose by as much as 1.03% to $0.695, its highest against the U.S. currency since Aug. 30, while the kiwi was last up 0.51% at $0.638, hovering around its highest in three weeks.

Elsewhere, the Brazilian real fell around 1% against the dollar after supporters of far-right former president Jair Bolsonaro were arrested after invading the country's Congress, presidential palace and Supreme Court.