The dollar was on the defensive against its peers on Friday after soft service sector employment data dampened expectations the Federal Reserve would hike interest rates soon, looking to US non-farm payrolls later in the session for possible relief.

The euro was nearly flat at $1.0939 after surging 0.8 per cent overnight. The overnight spike lifted the common currency away from a one-month trough of $1.0825 plumbed midweek.

The dollar was little changed at 113.62 yen after being nudged off the previous day’s high of 114.28.

Employment index

The Institute for Supply Management (ISM) had said on Thursday its employment index fell to 49.7 in February from 52.1 a month earlier, the first contraction in service-sector employment since February 2014.

While that weighed on the greenback, the market’s attention has quickly moved on to the non-farm payrolls report, which is expected to show US employers added 190,000 jobs in February according to economists polled by Reuters.

“Interest rate hike expectations dropped significantly last month, so a strong jobs report would help the dollar by adding to the case for a hike in June by the Fed,’’ said Shin Kadota, chief Japan FX strategist at Barclays in Tokyo.

“But even a strong report won’t do much to change perceptions that the Fed will not hike in March,’’ he said.

Global growth concerns and patches of weak US data have helped reduce near-term rate hike prospects this year, with financial markets not expecting the Fed to tighten at its March 15-16 policy meeting.

China parliament meet

In addition to the US jobs data, events in China were also in focus with the National People’s Congress (NPC) — an annual meeting of the country’s parliament — kicking off on Saturday.

The markets will study how China will try to steer a slowing economy as Beijing finalises its plan for development over the next five years.

“China is caught in a dilemma as it wants to support the economy by monetary easing, but this weakens the yuan and causes an outflow of capital,’’ said Junichi Ishikawa, a forex analyst at IG Securities in Tokyo.

“The NPC will be watched closely to see if China comes up with comprehensive steps, including fiscal spending. Currencies will be affected as risk sentiment will improve or worsen depending on China’s steps.’’

A deterioration in risk sentiment was among the factors that took the dollar to a 16-month low below 111 versus the safe-haven yen in February.

Australian dollar

Elsewhere, the Australian dollar stood near a three-month peak of $0.7374 scaled overnight. A recent rebound in prices of commodities such as crude oil and iron ore and supportive domestic data have trimmed expectations of a future interest rate cut by the Reserve Bank of Australia.

The Canadian dollar, another commodity-linked currency buoyed by a surge in oil, hovered near a three-month high of C$1.3372 per dollar.

The US dollar’s overall weakness favoured the recently battered pound, which traded near a 10-day peak of $1.4194 touched overnight. Fears of Britain leaving the European Union had knocked sterling to a seven-year low of $1.3836 on Monday.

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