SINGAPORE, Jan 5 Reuters The dollar was steady on Friday, heading for its strongest weekly performance since July on scaled back expectations of steep and early interest rate cuts this year ahead of closely watched U.S. payrolls data later in the day.

The U.S. currency39;s strong start has cast a shadow on the Japanese yen , with the Asian currency down 2.5 against the dollar in the first week of the year, its weakest weekly performance since August 2022.

The dollar39;s rebound will be tested by the nonfarm payrolls report due later in the session. Economists polled by Reuters forecast that 170,000 jobs were created in December, fewer than the 199,000 in November.

Market probably got ahead of itself late last year in terms of pricing the soft landing, said Moh Siong Sim, currency strategist at Bank of Singapore, referring to 160 basis points of cuts this year priced in by markets at the end of 2023.

Fed officials in December predicted 75 bps of rate cuts in 2024, driving moneymarket bets for around double that amount, with market optimism spurring a yearend blistering rally in stocks and bonds.

But since the start of the year, markets have dialled back their expectations. Traders are now pricing in less than 140 basis points of cuts this year, with the chance of a cut in March at 65 versus 86 a week earlier, CME FedWatch tool showed.

Sim said the data this week has shown that the U.S. labour market seems to be holding up and perhaps the Fed will still need to…