LONDON (Reuters) - The dollar rose and government borrowing costs from Japan to Germany hovered around fresh highs on Friday, on expectations of strong U.S. data that would back the case for an imminent scaling-back of Federal Reserve stimulus.
U.S. non-farm payrolls, due at 1330 GMT, could tip the balance of when the Fed will begin to trim the $85 billion a month of bond purchases which have dominated trading across the globe and supported risk assets for months.
A better-than-expected employment picture from the ADP private sector jobs report and weekly jobless claims in the last two days have prompted markets to prepare for a possible beat to forecasts of an increase of 180,000 in U.S. payrolls.
German 10-year yields held at seven-week peaks on Friday, while Bund futures were 1 tick up at 139.97, on track for their biggest weekly fall since mid-August.
In Japan, 10-year cash JGB yields were highest since early October, while U.S. Treasury yields on Thursday rose to levels not seen since mid-September - when Fed tapering was last seen as imminent.
The market would tend to see anything over 200,000 on non-farm payrolls as greatly adding to the chances of a start to tapering this month, while a result under 150,000 would diminish the likelihood, likely prompting a relief rally in risk assets.
“A very strong payroll would give greater confidence that the U.S. has weathered the recent government shut down well,” said Luke Bartholomew, investment analyst at Aberdeen Asset Management.
It would “increase speculation that tapering could still be on the cards for December. So, perversely, a strong number could be damaging for stocks and other risk assets.”
European bourses made a cautious recovery in morning trade .EU, as London’s FTSE .FTSE, Paris’s CAC 40 .FCHI and Frankfurt’s Dax .GDAXI gained 0.2 to 0.4 percent.
But the small gains came after four straight sessions of falls, amplified by the diverging fortunes of the region’s top economies, which have left the broad FTSEurofirst 300 index .FTEU3 heading for its worst week in six months.
Similarly, the MSCI World Index added 0.2 percent, edging up from a three-week low but still down 1.7 percent on the week .MIWO00000PUS in the face of Fed policy concerns.
In September though, when markets had been positioned for the taper to start that month, the Fed surprised investors by staying put, and analysts said this could happen again.
“If we are significantly above 200,000, no doubt people will get excited about it, but ... that is hardly a labor market that is delivering a rapid rate of improvement,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.
“The key point is that the underlying momentum in that economy is not particularly stronger than moderate. I think you would need a very big upside surprise to justify that,” he added, referring to the likelihood of a Fed move this month.
The dollar edged higher against a basket of currencies .DXY and the yen ahead of the data.
“A generic dollar long (investor) will hope that the payrolls number is strong enough to boost bond yields, but not strong enough to boost or scare equities in equal measure,” said Geoffrey Yu, currency strategist at UBS.
Against the euro, though, the greenback held in sight of Thursday’s five-week low, hit after the European Central Bank appeared in no rush at its last meeting of the year to offer any further stimulus to the euro zone economy.
Draghi’s playing down of the need for another long-term liquidity operation (LTRO) disappointed dealers who had been hoping for just such an operation to ease a liquidity squeeze over year end.
In commodity markets, spot gold held at $1,227 an ounce, on track for a loss for the week of around 2 percent.
Brent crude rose above $111 a barrel, ending a two-day drop as severe weather cut oil output in Europe and the United States.
Additional reporting by Marc Jones and Anirban Nag; Editing by Catherine Evans