Dollar Softens, China Inflation Data Takes Centre Stage

By Rae Wee

SINGAPORE (Reuters ) - On Monday, the dollar suffered a setback after a disappointing U.S. employment report lowered market expectations about how far the Federal Reserve will need to increase rates. In Asia Day, the focus was on China's release of inflation data.

Data released on Friday revealed that the U.S. economy created 209,000 new jobs in the last month. This was the lowest increase in two-and-a half years, and the first time payrolls have fallen short of expectations in 15 months.

The dollar fell by nearly 1% on Friday against a basket currency, while the yen soared.

In early Asia trading on Monday, the Japanese yen bought 142.30 dollars. It had risen 1.4% the previous day in response to the dollar's fall and the slump in U.S. Treasury rates. [US/]

The dollar/yen is sensitive to U.S. yields, as Japan's interest rates are near zero.

Chris Weston is the head of research for Pepperstone. He said, "I suspect that you had a market going into payrolls that was high on expectations... with that in mind people reduced some of these dollar longs."

We've also seen large flows back into the yen, and we've even seen people trying to cover some yen shorts.

The British pound also firmed up near a one-year-old peak of $1.2850, which was reached on Friday. It last traded at $1.2829 as the bets increase that stubborn inflation will force the Bank of England into raising interest rates to an all-time high of 6.5% in December.

The dollar index rose by 0.09%, to 102.38, but was still not far off Friday's 2-week low.

Weston said, "I don't believe that U.S. Dollar move... whether it's sustainable." "But it kind of screams that the market clearly sees the Fed at the later stage (of the monetary tightening cycle)."

Investors are likely to be hoping for more support from Beijing as they await the release of China's consumer price data due on Monday. It is expected that inflation will have remained at 0.2% for June.

The Australian dollar (often used as a liquid substitute for the yuan) was last down 0.14% at $0.6683 while the New Zealand Dollar fell 0.16% to $0.6199.

In a recent note, MUFG analysts stated that they expect the CPI to stay low because demand will remain weak and producer prices will continue to fall.

We expect the People's Bank of China to take more measures to reduce the expectations of a yuan depreciation, which will support the currency in the future.

The offshore yuan was slightly lower last time at $7.2341 per US dollar. It has been under pressure for the past few months due to the faltering recovery of China's economy.