A look at what will happen next in the world economies
Saturday, July 11, 2015
Dollar Edges Higher on Solid Employment Data Ahead of Jobs Report
Amazing how the dollar was finished only a few years ago. Aivars Lode
By James Ramage
The dollar firmed against the euro and the yen on Thursday, as better-than-expected data on U.S. claims for unemployment insurance fueled investor expectations for a robust May jobs report on Friday.
The dollar also gained as traders took profit from the euro’s recent rally that had been supported by a drop in German government bond prices.
The currency market also weighed comments by the International Monetary Fund recommending that the Federal Reserve delay its expected increase in short-term interest rates into 2016, until there are clearer signals of wage and price inflation in the U.S.
The dollar climbed 0.3% against the common European currency, with one euro buying $1.1242 in late-afternoon trade, on track to end a sharp two-day decline. The dollar lost 3.1% over the two previous sessions, as an improving picture of the eurozone economy and outlook for inflation led to a substantial selloff in German government bonds that extended to U.S. Treasurys and prompted a reversal in bets against the euro.
The dollar rose 0.1% against the yen to Y124.36, climbing for a second consecutive session and nearing its highest level against the Japanese currency since December 2002. The Wall Street Journal Dollar Index, which gauges the value of the dollar against a basket of 16 widely traded currencies, increased 0.3% to 86.78.
“The U.S. jobless data gave the dollar a little bit of a boost,” said Sireen Harajli, foreign exchange strategist at Mizuho Bank. “But we’re also seeing the market reacting a little after headlines from the IMF comments…It’s not anything concrete behind these moves. Nonfarm payrolls tomorrow should give the market something more definitive in the dollar’s move.”
The dollar’s recent gyrations reflect investors’ uncertainty over the extent of the U.S. economic recovery and the timing of the Fed’s first increase in interest rates in nine years. Many asset managers piled into the dollar and U.S. assets with the conviction that the Fed would raise borrowing costs in 2015, which drove the dollar to multiyear highs against the euro and the yen. Meanwhile, central banks in the eurozone and Japan have been easing policy to lift their economies and avert deflation.
But some soft U.S. data have shaken investors’ faith in America’s recovery and pushed back their expectations for higher interest rates. On Thursday, the IMF said in its annual review of the U.S. economy that the strong dollar and poor weather had sapped momentum for job creation and expansion. These negative shocks moved the fund to downgrade its growth expectations to 2.5% for the year, compared with an estimate for a 3.1% expansion in April.
The IMF’s call for the Fed to refrain from raising interest rates until the first half of 2016 resonated with some investors. IMF Managing Director Christine Lagarde sent a warning sign that this dollar rally may be reaching its expiration date, said Jonathan Lewis, chief investment officer at Samson Capital Advisors. “Many dollar bulls have bought the dollar on the view that the Fed is going to tighten soon; Lagarde is telling the Fed that tightening would be a mistake and that the dollar is overvalued,” Mr. Lewis said. “If the Fed listens to Largarde, an important argument for a strong dollar disappears.”
But starting to raise interest rates in 2015 would be appropriate, said Ugo Lancioni, currency fund manager at Neuberger Berman. “Rates have been way too low for too long,” Mr. Lancioni said. “We need to see domestic wages picking up, inflation picking up, stable growth; those need to be in place. But monetary policy in the U.S. is still very loose, and an adjustment would be justified by the improving fundamentals we’ve seen over the last few years.”
On Friday morning, the Labor Department will release its jobs numbers for May. Economists forecast the U.S. last month to have created 225,000, the unemployment rate to steady at 5.4% and for hourly wages to rise 0.2%.
The dollar picked up after initial claims for unemployment benefits declined 8,000 to a seasonally adjusted 276,000 in the week ended May 30, below economists’ expectations for 279,000 claims. “People might see the dollar at attractive levels now [and enter into long bets] ahead of the payrolls numbers, in case it’s a strong report,” said Vassili Serebriakov, currency strategist at BNP Paribas.