March 6 (Reuters) - The dollar index pared losses after falling to its lowest level since U.S. elections on Thursday as worries about a slowing U.S. economy, the outlook for AI and ongoing trade war weighed on share prices. Treasury 2-year yield fell after a report that announced layoffs tracked by Challenger, Gray & Christmas jumped in February amid mass federal government job cuts, canceled contracts and fears of trade wars. The trade deficit reached a record in January, offering another drag on growth.
By contrast, a drop in weekly jobless claims suggested a more fluid jobs market.
Regarding Friday’s employment report, analysts see non-farm payrolls rising by 160,000 in February with the unemployment rate holding steady at 4.0%.
Philadelphia Federal Reserve President Patrick Harker said the U.S. economy is currently in good shape but showing signs of stress. Harker also said he's worried about government borrowing and the dollar's ongoing role as the world's reserve currency.
Risk sentiment briefly improved after U.S. Commerce Secretary Howard Lutnick suggested a tariff reprieve may apply to a broader range of Mexico and Canada goods and that the policy is flexible. U.S. President Donald Trump, after a call with leaders, said Mexico won't be required to pay tariffs on goods that fall under the United States-Mexico-Canada Agreement on trade until April 2, but made no mention of a reprieve for Canada. Mexican President Claudia Sheinbaum thanked Trump for an "excellent and respectful" call, and promised to work on security and migration issues. Canada Prime Minister Justin Trudeau said the country will continue to engage with senior Trump administration officials about tariffs.
U.S. Treasury Secretary Scott Bessent later said income from tariffs could be substantial, that reciprocal tariffs due in April will be path-dependent and that they are taking seriously reducing debt.
EUR/USD reversed gains after the European Central Bank cut interest rates by 25 basis points, as expected, and hinted at more cuts ahead though warned that trade wars and defense spending could fuel inflation. ECB President Christine Lagarde said the central bank would be even more dependent on incoming data than in the past, and that it would pause easing if the numbers suggested that was needed to get inflation to 2%. German lawmakers will debate a 500-billion-euro infrastructure fund and sweeping changes to state borrowing rules to fund defense from March 13. Separately, there are reports U.S officials are headed to Saudi Arabia next week to meet with Ukrainian officials. Thursday’s modest EUR/USD move comes after a three-day surge that sent it into overbought territory. A bearish top is forming on candles though option sentiment remains bullish, suggesting a pullback may be short-lived. The pair’s 200-day moving average at 1.0721 offers nearby support. GBP/USD maintained a bullish vibe, tracking its upper Bollinger higher, though price congestion near 1.30 should slow gains. British companies expect to raise prices faster in the coming 12 months, a Bank of England survey showed. Central bank policymaker Catherine Mann said a pick up in inflation was unlikely to lead to longer-term price problems in Britain's economy, and that global volatility had weakened the case for a gradual approach to cutting rates.
USD/JPY fell to new year-to-date low of following the Challenger data and remains heavy with U.S. shares under pressure.
Option risk reversals have shifted in favor of yen calls across tenors in the run up to Friday’s U.S. jobs data. Rising JGB yield are seen limiting yen losses. USD/JPY may revisit the key 145 pivot level should it slip below its September 3 high of 147.20 and October 2 high of 146.52, with a move above 149 sidelining short-term bears.
Treasury yields edged up as much as 2 basis points. The 2s-10s curve was up about 2 basis points to +29.6bp.
The S&P 500 fell 1.94% as consumer shares struggled
Oil was little changed on the session.
Gold eased 0.10% while copper rose 0.27%.
Heading toward the close: EUR/USD -0.09%, USD/JPY -0.70%, GBP/USD -0.06%, AUD/USD +0.00%, =USD -0.06%, EUR/JPY -0.77%, GBP/JPY -0.78%, AUD/JPY -0.70%.(Editing by Burton Frierson Reporting by Robert Fullem)
