Dollar swings with currency markets nervous ahead of upcoming jobs data

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

By David Henry and Iain Withers

NEW YORK/LONDON (Reuters) - The dollar recovered from a fall on Wednesday brought on by the release of an unexpectedly weak private employment report knocked down U.S. Treasury yields and may or may not have foreshadowed softness in jobs data due on Friday from the American government.

After a steady day, the dollar index against major currencies fell as much as 0.2% on the report before turning back up. It was up less than 0.1% on the day at 10:08 a.m. EDT (1408 GMT).

The Japanese yen, often seen as a competing safe haven, was a big beneficiary with the dollar falling as low as 108.77.

The euro and British pound also gained against the greenback.

The euro was last trading at $1.1859, off less than 0.1% for the day. Sterling rose 0.1% to $1.3930.

The swings show how uneasy the currency markets are ahead of the next big catalyst that might show whether economies will grow so quickly that they fuel inflation or slow due to the continuing coronavirus pandemic.

The initial downdraft came when the ADP National Employment Report showed U.S. private payrolls increased about half as much as economists had expected, likely constrained by shortages of workers and raw materials.

"It was a fairly big disappointment," said Mazen Issa, senior currency strategist at TD Securities.

The ADP report has a mixed record of predicting the government report, Issa said, but added, "the miss is substantial enough that the markets may be a little bit more nervous going into Friday's report."

Federal Reserve Chair Jerome Powell and other policy makers have recently emphasized that upcoming employment reports will be critical to the board's decisions about when and how to cut back on support for the economy.

The ADP report does not capture changes in government employment.

The yield on the 10-year U.S. Treasury initially fell sharply and the 5-year yield slipped to its lowest since February. Those moves came after the ADP report and news that the government is considering reductions in debt issuance.

Questions about the supply of Treasuries have been affecting yields and having spillover influence on the dollar.

The dollar has lost value as declining yields have made strategists question whether the U.S. economy will grow as much as they had expected in light of the spread of the highly contagious Delta variant of COVID-19.

Before the ADP report, the euro had been flat against the dollar, giving up initial gains on data that showed euro zone business activity surged in July, expanding at its fastest pace in 15 years.

The New Zealand dollar made strong gains for the second consecutive day, after a drop in unemployment in the country raised expectations that rate hikes could begin within weeks.

The kiwi was last up 0.6% against the U.S. dollar, at $0.7061.

The country's central bank had said on Tuesday it would soon begin consulting on ways to tighten mortgage lending standards, as it tries to control an inflated housing market.