The dollar eased against most major currencies on Thursday as support from the Federal Reserve's hawkish messaging subsided a day before hotly anticipated U.S. jobs data, even as pessimism about a protracted recession ebbed.
The Bank of England on Thursday raised interest rates by the most since 1995, but the British pound weakened as the central bank warned that a long recession was on its way with inflation seeing toping 13%.
The dollar index fell 0.338% at 106.110, with the euro up 0.35% to $1.02.
It slightly extended early slippage on data showing of the number of Americans filing new claims for unemployment benefits increased last week, while the U.S. trade deficit narrowed sharply in June as exports surged to a record high, a trend that could see trade continuing to contribute to gross domestic product in the third quarter.
The Japanese yen strengthened 0.40% versus the greenback at 133.32 per dollar, while sterling was last trading at $1.2116, down 0.22% on the day.
"There is a mentality now across markets that we know what's coming in terms of monetary tightening," said Juan Perez, director of trading at Monex USA in Washington. Investors are taking a view that "whatever downturn we're facing in the next few months will be short-lived."
Investors will get a key snapshot of how the U.S. economy is faring on Friday, when the Labor Department reports employment data for July. Signs that the U.S. job market continues to be robust will likely bolster expectations for more monetary policy tightening from the Fed.
Fed officials have continued to push back against the perception that U.S. interest rates were close to peaking. San Francisco Fed President Mary Daly and Minneapolis Fed President Neel Kashkari voiced their determination overnight to rein in high inflation.
But the impact of Fed rhetoric on the dollar appeared to be fading.
"Yesterday we had some hawkish comments, but maybe that's not enough and investors will be looking for confirmation from data, especially tomorrow's payrolls number," said ING currency strategist Francesco Pesole, referring to U.S. jobs data.
"The effect on the dollar is fading today. Risk sentiment is also more upbeat and it doesn't look like markets are too worried about the Taiwan situation."
A visit by U.S. House of Representatives Speaker Nancy Pelosi to the self-ruled island led to increased tensions between Washington and Beijing, which regards Taiwan as its sovereign territory.
The dollar's strength has yet to peak, a Reuters poll released on Thursday showed. Of those polled, 70% thought the dollar had some room to rise further in this cycle, even after its index hit its highest level in two decades in July.
Money markets price in a 50 basis-point hike at the Fed's September meeting, and a roughly 44% chance of another massive 75 bps increase. The Fed hiked rates by 75 basis points at its meeting in June and July. [FEDWATCH]
Britain's pound fell after the BoE meeting and was last down almost 0.5% at $1.2090
"No surprise in the headline decision to hike the interest rate by a 0.50% increment," said Sam Cooper, vice president, market risk solutions at Silicon Valley Bank.
"However, the bleak outlook for GDP and rising inflation forecasts included in the meeting minutes have dampened market confidence and this has translated into a weaker sterling."