FOREX-Dollar makes tentative gains despite weak data, euro steady ahead of ECB

By Lucy Raitano and Ankur Banerjee

SINGAPORE/LONDON, June 5 (Reuters) - The euro steadied near six-week highs against the dollar ahead of an expected interest rate cut by the European Central Bank on Thursday, while the U.S. currency recovered modestly from a dip after data renewed fears of slow growth and high inflation.

Data on Wednesday showed the U.S. services sector contracted in May for the first time in nearly a year, and also an easing labour market, yielding a rally in Treasuries and increasing the chances of more rate cuts by the Federal Reserve this year.

"For most of the week, we've been staying in relatively tight ranges... There was dollar softness yesterday after the downside surprise in the ISM services data, but slightly calmer heads are prevailing this morning," said Michael Brown, senior research strategist at Pepperstone.

On Thursday, the dollar was up 0.26% against the yen JPY=EBS at 143.165, and 0.15% higher against the Swiss franc at 0.8195 francs CHF=EBS, as analysts pointed to repositioning after weakness in the greenback on Wednesday.

Brown said FX markets were essentially in a holding pattern until the ECB decision later on Thursday, and ahead of the closely-tracked U.S. May jobs report on Friday.

The euro EUR=EBS was unchanged at $1.1412, not far from a six-week high it touched at the start of the week.

The ECB is expected to cut its benchmark rate by a quarter of a point, marking the eighth reduction in 13 months as inflation eased from post-pandemic highs. The central bank is seeking to prop up a euro zone economy that was struggling even before the erratic economic and trade policies of U.S. President Donald Trump's administration dealt it yet another blow.

Commerzbank analysts said the ECB was likely to lower its growth and inflation forecasts for 2025 slightly.

Francesco Pesole, FX strategist at ING, said that while risks are to the downside for the euro ahead of the meeting, his team will be listening closely for any mention of a global euro that could be positive for the currency.

Last week, ECB President Christine Lagarde said that the euro could become a viable alternative to the dollar.

"You can see why she would be in favour, her mandate is inflation, and if you have a stronger currency you have lower inflation," said Pesole, though he added there might not be the same level of support among other governing council members.

Data on Tuesday showed euro zone inflation easing below the ECB's 2% target, supporting rate cut bets.

PAYROLLS DATA

Friday's monthly U.S. payrolls figures will reveal the state of the labour market, after payroll processing firm ADP said on Wednesday that U.S. private payrolls increased far less than expected in May.

The more comprehensive employment report on Friday is expected to show that non-farm payrolls increased by 130,000 jobs in May, after advancing by 177,000 in April, according to a Reuters survey of economists. The U.S. unemployment rate is forecast to hold steady at 4.2%.

Markets have been rattled since Trump announced a slate of tariffs on countries around the world on April 2, only to pause some and declare new ones, leading investors to look for alternatives to U.S. assets.

Investors remain worried about U.S. trade negotiations and the lack of progress in hashing out deals ahead of an early July deadline.

The dollar index =USD, which measures the U.S. currency against six others, was at 98.87 and has dropped about 9% this year, poised for its weakest yearly performance since 2017.

Trump on Wednesday redoubled his calls for Federal Reserve Chair Jerome Powell to lower interest rates after the ADP data were released, keeping up pressure on Powell that has stoked worries about the independence of the U.S. central bank and unnerved investors.

Markets have priced in 56 basis points of rate cuts this year from the Fed, with traders pricing in a 95% chance for easing in September, LSEG data showed.