FOREX-US dollar bounces back after sharp selloff ahead of inflation test

By Gertrude Chavez-Dreyfuss

NEW YORK, Sept 9 (Reuters) - The U.S. dollar gained against most currencies on Tuesday except against the yen, recovering from losses the previous session, as investors consolidated positions ahead of key inflation reports this week.

U.S. producer price inflation data is due on Wednesday followed by the consumer price inflation reading on Thursday. The data points will be in focus to gauge the impact of tariffs on prices in the world's largest economy.

The greenback briefly dropped after a report showing downward revisions of nearly a million fewer jobs to previous government estimates for the April 2024 to March 2025 period. That suggested a far weaker labor market than what initial numbers showed in that 12-month period.

But the payrolls data was largely shrugged off.

In afternoon trading, the euro fell 0.5% against the dollar to $1.1707 EUR=EBS, pushing the dollar index 0.4% higher at 97.78 =USD. Earlier in the session, the dollar index fell to a seven-week low.

Against the Swiss franc, the dollar rose 0.6% to 0.7976 franc after earlier hitting a six-week trough.

Even though the dollar gained on Tuesday, Elias Haddad, senior markets strategist at Brown Brothers Harriman in London said the big theme right now is that the more recent dovish turn in Federal Reserve policy "will lead to the U.S. dollar to new cyclical lows."

"The big reason is that the Fed will now prioritize its maximum employment mandate over price stability because monetary policy is moderately restricted. Any rally, or any relief rally in the U.S. dollar is not sustainable."

Tuesday's data on jobs revisions placed that employment mandate in focus.

Data from the Bureau of Labor Statistics showed that the payrolls numbers were revised down by 911,000 jobs in the 12 months to March. In previous 12-month period through March 2024, the level of employment was slashed by 598,000 jobs.

According to Action Economics, the downward revision was the largest figure on record, topping the -824,000 reading in March of 2009 and the -818,000 figure in March last year. The revision implies job reductions of 76,000 per month for the 12-month time frame.

"The only thing growing faster than job-growth skepticism is the pressure on the Federal Reserve to finally sneak in some interest rate cuts because nothing says economic cooling (more than) jobs turning into ghost stories," said Michael Ashley Schulman, chief investment officer at Running Point in El Segundo, California.

"Payroll revisions just turned the job story from fairy tale to audit trail ... the biggest reality check in years, which is another way of saying the jobs fairy just clawed back a lot of cheer," he added.

Midafternoon on Tuesday, U.S. rate futures priced in a 92% chance of a 25 basis-point cut later this month, and an 8% probability of a 50-bp easing.

Elsewhere, sterling fell 0.5% to $1.3521 GBP=D3, while the commodity-linked currencies -- the Australian AUD=D3, New Zealand NZD=D3, and Canadian dollars CAD=D3, all slid against the greenback.

Some analysts said a strong U.S. Treasury three-year auction also contributed to the dollar's rally.

The auction showed a strong outcome, offsetting the disappointing results from August. The auction priced well and notched record end-user demand, Action Economics analysts said.

"Something that might have contributed would have been strong auction behavior today, there's been a pretty consistent rally across the Treasury curve in the last week or so," said Julia Hermann, global market strategist, at New York Life Investments.

Later this week, the focus will be on the euro zone, with the European Central Bank widely expected to keep rates unchanged at its policy meeting on Thursday.

Economists were split last month on the likelihood of further rate reductions by the ECB, but sentiment has shifted with recent data showing inflation holding close to the 2% target and unemployment at a record low.