Dollar drifts below one-year high as payrolls test looms large

© Reuters. FILE PHOTO: A U.S. dollar banknote is seen in this illustration taken May 26, 2020. REUTERS/Dado Ruvic/Illustration/File Photo

By Kevin Buckland

TOKYO (Reuters) - The U.S. dollar drifted below a one-year high versus major peers on Tuesday as traders waited on key U.S. payrolls data at the end of the week for clues on the timing of a tapering of Federal Reserve stimulus and the start of interest rate hikes.

The Australian dollar maintained a three-day gain, trading little changed at $0.72905 from the day earlier, when it touched a four-day high of $0.73045. The Reserve Bank of Australia meets on Tuesday, with economists polled by Reuters unanimously predicting no change to the policy rate.

The New Zealand dollar held close to the previous session's four-day high of $0.6981, changing hands at $0.6960 after three days of gains. Markets are priced for a quarter point rate hike when the nation's central bank decides policy on Wednesday.

The U.S. dollar index, which measures the currency against six rivals, was about flat at 93.845, easing back slightly since peaking Thursday at 94.504, its highest since late September 2020.

That followed a rally of as much as 2.8% since Sept. 3 as traders rushed to price in tapering as soon as next month and possible rate rises next year, while the currency also benefited from safe-haven demand amid worries spanning the risk of global stagflation to the U.S. debt ceiling standoff.

"There's a lot of bad global news priced into the USD," Mark McCormick (NYSE:MKC), the global head of FX strategy at TD Securities, wrote in a report. "The key for markets in the weeks ahead is to sort out the extent of the risk premium already priced in versus how these factors play out."

"While the near-term USD bias leans higher, we're wary about chasing the move at these levels," McCormick said.

Friday's nonfarm payrolls data is expected to show continued improvement in the labour market, with a forecast for 488,000 jobs to have been added in September, according to a Reuters poll - enough to keep the Fed on course to begin tapering before year's end.

Elsewhere, Canada's dollar traded near an almost one-month high of C$1.2558 per greenback reached on Monday - edging about 0.1% lower to C$1.2599 - buoyed by crude oil's rally to a three-year peak.

Sterling held near a four-day high of $1.3640, last changing hands at $1.36005.