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Dollar plunges after us jobs data { March 5 2004 } Original Source Link: (May no longer be active)
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Dollar plunges after US jobs data
by Steve Johnson in London
Published: March 5 2004 11:43 | Last Updated: March 5 2004 16:59
What goes up must come down was the motto of the currency markets this week.
The US dollar threatened to break out of its losing streak, chalking up its biggest one-day gain in more than a year against the euro on Tuesday.
But by Friday the greenback was back in freefall as US jobs growth almost ground to a halt, and analysts saw the euro heading back towards the virgin territory of $1.30.
The dollar's rally had been kickstarted by hints from US survey data that the recovery was finally starting to produce significant job growth, with the futures market pointing to a 40 per cent likelihood of a US rate rise by June.
This rosy view led the euro to fall 4 cents to $1.2082 by midweek with sterling tumbling 6 cents to $1.8191. But Friday's all-important US non-farm payrolls grew by a paltry 21,000, compared to consensus forecasts of 125,000 even before expectations were heightened. Personal income growth was a dire 1.6 per cent.
"It's not just a jobless recovery, it's effectively a payless recovery as well," said Mark Cliffe, chief economist at ING. "It shows how reliant the consumer has been on tax cuts to fund consumption." The dollar plummeted 1.8 per cent to $1.2401 against the euro by mid-session in New York, and by 1.5 per cent to $1.8450 against sterling, as the likelihood of a rate rise by June slumped to 18 per cent.
Both Citigroup and BNP Paribas said they now saw the euro breaching the $1.30 mark for the first time ever in the second quarter of the year. "The fundamentals really haven't changed, the risk has got to be that the dollar will weaken," said Steven Saywell at Citigroup. However the Bank of New York argued that the dollar's upswing could run further if a barrage of data due next week proved positive.
Even at the zenith of the dollar's midweek rally, few commentators believed it was really the turning point in the fortunes of the beleaguered greenback. The consensus view was that traders who had assumed the dollar was a one-way bet, and had thus gone long on the euro and sterling, rapidly neutralised their positions as the dollar started to awake from its slumbers. A swathe of stop-loss orders were triggered, exacerbating the dollar rally.
Furthermore we saw "a verbal assault by the Europeans and a monetary assault by the Japanese," added Mr Cliffe, referring to an ultimately abortive attempt by politicians to persuade the European Central Bank to weaken the euro by cutting interest rates, and talk of further widespread dollar buying by the Bank of Japan.
The hand of the BoJ was seen in the fact that the yen was virtually unchanged against the dollar on Friday, gaining a fraction at Y111.13 after slipping from Y109.06 at the start of the week. As such, the yen approached five year lows against both sterling and the single currency, at Y205.19 and Y137.89 respectively.
A decision by the Japanese parliament to release a further $359bn to fund intervention in the market played its part, as did speculation that the BoJ had once again lowered its threshold for intervention, and was selling yen at the Y110.50 mark.
"Speculation persists that the Japanese authorities continue to place bids at higher levels in order to force the dollar back to the Y115 level that it was trading prior to the G7 meeting in Dubai last September," said Derek Halpenny, currency economist at Bank of Tokyo-Mitsubishi.
Japanese finance minister Sadakazu Tanigaki said the yen was depreciating because traders and investors were "correcting" long yen positions, coinciding with data showing speculative yen positions turned from net long to net short this week for the first time since August.
Japan also reported its first net outflow of funds for almost two months in the last week of February. The outflow appears to be driven by Japanese government bond yields rising to 1.4 per cent from 1.2 per cent in late February, depressing prices. Japanese investors purchased Y251bn of foreign assets last week, after selling Y229bn a week earlier.
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