FOREX-Dollar steady with focus on crucial US payroll data

By Ankur Banerjee and Johann M Cherian

SINGAPORE, July 3 (Reuters) - The dollar remained close to this week's 3-1/2 year lows on Thursday ahead of a key jobs report, and as a U.S.-Vietnam trade accord fanned expectations for other potential deals ahead of July 9 when U.S. tariffs take effect.

All eyes are on the U.S. Labor Department's comprehensive employment report for June, due for release a day ahead of the July 4 holiday, which is expected to show that unemployment edged up to a more than a 3-1/2-year high of 4.3%, according to economists polled by Reuters.

Reports earlier in the week had painted a mixed picture about the health of the labor market, stirring uncertainty about how the U.S. administration's policies have affected the economy.

An ADP survey in the previous session in particular offered a grim view of the labor market and a similar report could weigh on the dollar as markets price in the likelihood of imminent monetary policy easing by the Federal Reserve.

Traders currently see a 25% chance of a 25 basis points cut in July versus 19% a day earlier, data compiled by LSEG showed.

The U.S. rate market is not yet putting too much weight on the negative ADP reading but it leaves the dollar vulnerable to another leg lower today, said Lee Hardman, a senior currency economist at MUFG.

The worst case scenario for the dollar would be a negative nonfarm payrolls print and a jump in the unemployment rate above 4.2%, which could even encourage speculation about a larger 50 bps cut in July.

The dollar was stronger by 0.1% against the yen JPY=EBS and the Swiss franc CHF=EBS, while the euro EUR=EBS was muted and last fetched $1.79.

The U.S. dollar index =USD, which measures the greenback against six other currencies, was flat at 96.804, remaining close to the 3-1/2-year lows it has been rooted to this week. The index is on course for a 0.5% drop for the week.

Investors were also keen on developments in Washington, after Republicans in the U.S. House of Representatives cleared a procedural hurdle to advance President Donald Trump's massive tax-cut and spending bill, paving the way for a debate and final vote on the highly contested legislation within the next 24 hours.

The bill is set to add $3.3 trillion to an already swelling national debt, stoking fiscal worries. Bond investors around the world are growing increasingly nervous about government deficits in countries including Japan and the United States.

On Thursday, U.S. bond markets were broadly steady with the yield on the 10-year Treasury note US10YT=RR last down by about 3 basis points.

TRADE DEALS

Ahead of the July 9 tariff deadline, Trump said the United States had struck a deal with Vietnam and that he could push other countries to reach similar agreements.

Although details were scant, Trump said Vietnamese goods would face a 20% tariff and trans-shipments from third countries through Vietnam will face a 40% levy.

The Vietnamese dong VND=VN slid to a record low, with UBS analysts suggesting the passing of tariff costs to exporters will likely be mitigated by the central bank through the allowance of a steady depreciation of the dong.

Progress on other deals has been slow. Japan has invoked national interests as talks with the U.S. struggled, while South Korea's President Lee Jae Myung on Thursday said negotiations were looking difficult and that he could not say whether talks would conclude by next Tuesday.

In Britain, sterling GBP=D3 and gilts stabilized following Wednesday's plunge, when UK Prime Minister Keir Starmer's office backed finance minister Rachel Reeves after rumours she would be dismissed over investor worries about Britain's finances.

"Although Starmer repeatedly emphasized afterwards that he fully backed his finance minister, the damage has been done. The market can no longer be sure that budgetary discipline will really be maintained in the UK," said Antje Praefcke, an FX analyst at Commerzbank.