Friday, May 6, 2016

FOREX-Dollar cedes ground before U.S. jobs report

* Dollar index slips, but on track for weekly gains

* Continues to pull away from 18-mth low vs yen

* Morgan Stanley ups euro/dlr forecast, downgrades dlr/yen (Updates prices, adds details, fresh quotes)

By Anirban Nag

LONDON, May 6 (Reuters) - The dollar slipped against a basket of currencies on Friday but stayed on track for weekly gains as investors readied for April's U.S. non-farm payrolls report.

The dollar index was down 0.1 percent at 93.697, having gained around 2 percent from a trough of 91.919 hit earlier this week and which was its lowest since January 2015.

It was 0.2 percent lower against the yen at 107.04 yen , having risen for three straight days to pull away from an 18-month low of 105.55 struck on Tuesday. It was on course for a weekly gain of 0.6 percent versus the yen.

The euro, which rose to an eight-month peak of $1.1616 on Tuesday, was steady at $1.1415.

A Reuters survey showed economists expect U.S. payrolls to have risen by 202,000 in April after increasing by 215,000 in March. A weaker-than-expected ADP report this week has tempered market expectations of a robust reading on Friday.

"It will need a significant upside surprise from the jobs report for the dollar to change trend," said Yujiro Goto, currency strategist at Nomura. "We expect gains in dollar/yen to be capped around 108 and similarly downside for the euro will be limited."

Some large funds have been cutting favourable bets on the dollar amid uncertainty over when the Federal Reserve will raise rates. Investors only see a 13 percent chance that the Fed will hike in June, according to CME's FedWatch.

On Friday, Morgan Stanley upgraded its euro/dollar forecasts and downgraded its outlook for dollar/yen, saying the European Central Bank and the Bank of Japan, which are both battling to ward off deflationary pressures, are running out of options to curb the strength of their currencies.

It expects dollar/yen at 103 yen in the end o f the second-quarter, compared with its previous forecast of 110, while the euro is expected to rise to $1.16, up from an earlier forecast of $1.06.

The Australian dollar shed 1.3 percent to a two-month low of $0.7361 after the Reserve Bank of Australia (RBA) slashed its inflation forecasts, suggesting the door was open for another interest rate cut.

(Reporting by Anirban Nag; editing by John Stonestreet)

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