Dollar edges higher with Friday's payrolls data in focus

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

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - The U.S. dollar edged higher on Tuesday, lingering close to the one-year high hit last week, as traders remained circumspect ahead of key payrolls report at the end of the week that could provide clues to the U.S. Federal Reserve's next move.

Moves in the FX market were likely to remain largely muted for the rest of the week as investors await the update on the U.S. labor market that could help provide clues to whether the Fed will begin tapering its asset purchases before year's end, analysts said.

"Nonfarm payrolls is always a market mover," said John Doyle, vice president of dealing and trading at FX payments firm Tempus Inc.

"An underwhelming print will give the Fed dovish cover, but a blowout reading, paired with rising inflation made worse by the energy crisis will put more pressure on the Fed to begin tapering and help the greenback," said Doyle.

Friday's non-farm payrolls data is expected to show continued improvement in the labor market, with a forecast for 488,000 jobs to have been added in September, a Reuters poll showed.

The U.S. dollar index, which measures the currency against six rivals, was 0.2% higher at 93.978, moving back towards Thursday's peak of 94.504, its highest since late September 2020.

"Generally, the U.S. dollar is trying to find new ranges after a strong rally at the end of September. In my opinion, the greenback's rally was overdone and we have seen that unwind over the past three to four days," Doyle said.

"The unlikely but looming possibility of the U.S. defaulting on its debt is what likely limited the dollar's upside," he said.

Worries about the debt ceiling are beginning to rattle investors as the deadline nears for Congress to raise the U.S. borrowing limit to avoid a historic default on U.S. debt.

Separately, the U.S. trade deficit raced to a record high in August, boosted by imports as businesses rebuild inventories, the latest sign that economic growth slowed in the third quarter.

The risk-sensitive Australian dollar fell 0.1%, with the Reserve Bank of Australia reiterating that it does not expect to raise interest rates until 2024.

Sterling rose to a near three-week high against the euro, recovering from a sharp sell-off last week as traders turn their attention back to the prospect of interest rate rises in Britain. (EURGBP=)

Cryptocurrencies rallied, a day after data from digital asset manager CoinShares showed cryptocurrency investment products and funds recorded inflows for a seventh straight week, as institutional investors warmed to more supportive statements from regulators.

Bitcoin, the world's biggest cryptocurrency by market value, hit $50,000 for the first time since Sept. 7.

GRAPHIC: Bitcoin bounce https://fingfx.thomsonreuters.com/gfx/mkt/myvmnozompr/Pasted%20image%201633442096046.png