After recovering from two-month lows touched the previous session, the US dollar rose after days of losses on Wednesday as investors reduced their short positions in order to lock in profits before the crucial U.S. non-farm payrolls report on Friday.

The U.S. private sector jobs data released on Wednesday confirmed that the dollar’s underlying trend remained bearish. The employment figures confirmed the idea that the Federal Reserve might not need to hike rates all that much more.

Investors will be watching Friday’s non-farm payrolls report for March; according to Reuters‘ survey of experts, there should be approximately 240,000 new jobs created.

The dollar index increased by 0.4% to 101.87 in afternoon trading, driven by gains versus the euro, which decreased by 0.5% to $1.0906.

The current „bar for the dollar to keep falling is high,“ according to Erik F. Nelson, macro strategist at Wells Fargo (NYSE:WFC) in London. He noted that the dollar tracks U.S. Treasury yields, which have experienced erratic movements lately.

The U.S. two-year rates, which measure interest rate expectations, dropped by around 74 basis points (bps) in March, the most since January 2008, when the global financial crisis was at its worst.

Because part of the dollar’s weakness is being caused by declining U.S. rates and Fed rate cuts that are being priced in, we need to continue to see weakness in the data. The dollar may be more resilient than anticipated if U.S. data do not support that, according to Nelson.

He made it clear that he is still pessimistic on the dollar, but added that rather than moving in a straight downward trend as a result of months and months of relentless selling, currency movements will instead „grind lower.“

According to the ADP National Employment report released on Wednesday, U.S. private firms employed fewer people in March than anticipated, indicating a slowing job market. Last month, private employment climbed by 145,000 jobs, versus the 200,000 job growth that economists surveyed by Reuters had predicted.

The report on fewer job openings for February was released on Tuesday. The Institute for Supply Management’s weak U.S. manufacturing survey, released on Monday, also indicated a weak employment component.

On Wednesday, a different report revealed additional economic deterioration, this time in the services sector. When demand decreased in March, that sector slowed down more than was anticipated, and a gauge of prices paid by businesses using services dropped to its lowest level in over three years.

The ISM’s non-manufacturing index dropped to 51.2 from 55.1 in February, while the component measuring prices paid dropped to 59.5 from 65.6 in February and the employment indicator for the services sector dropped to 45.8 from 47.6 in February.

According to Thierry Wizman, global FX and rates strategist at Macquarie in New York, „there is enough of evidence in the pipeline demonstrating that disinflation is the underlying trend…and part of the rationale as to why the Fed is sounding vague these days.“

In an interview with Bloomberg TV on Wednesday, Cleveland Fed President Loretta Mester, a well-known hawk, said it was too soon to say if the Fed would need to raise its benchmark rate at its upcoming policy meeting in early May.

There is now a 55% likelihood that the Fed will maintain interest rates at its upcoming meeting, up from a 43% possibility the day before, according to U.S. rate futures markets.

The market has also factored in approximately 85 bps reduction by year’s end.

The dollar suffered its third daily loss versus the yen in other currency markets, dropping 0.4% to 131.15. The US dollar’s exchange rate to the Swiss franc stayed unchanged at 0.9060 francs.

After 10 straight rate hikes, the Australian dollar fell 0.5% versus the US dollar to US$0.6720 the day after its central bank held rates steady at 3.6%, stating that it wanted more time to evaluate the effects of previous increases.

The Reserve Bank of New Zealand unexpectedly increased interest rates by 50 basis points to a more than 14-year high of 5.25%, sending the New Zealand dollar up 0.1% against the US dollar to US$0.6316. It then surged by as much as 1.1% to a two-month high of US$0.6379 in response.

 

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