Dollar Rises Against Euro and Yen; Job Losses Are a Quarter of Forecasts

Oct. 7 (Bloomberg) -- The dollar rose for the first day in three after the U.S. economy's job losses last month were less than a quarter of the number forecast by economists. Today's gain reduced the dollar's loss against the euro for the week, its first weekly decline in five. Interest rate futures indicate traders expect the Federal Reserve will raise its benchmark three more times to 4.5 percent by January. "It's dollar positive because you still have a much more resilient U.S. economy than had been expected,'' said David Durrant, investment strategist at Bank Julius Baer & Co. in New York, which manages about $30 billion. "The Fed's path hasn't changed -- this number tells us that after the next rate hike we should be looking for more.'' Against the euro, the dollar traded at $1.2129 at 5 p.m. in New York, from $1.2178 late yesterday, according to electronic currency-trading system EBS. The dollar rose to 113.82 yen from 113.30. For the week the dollar dropped 0.9 percent against the euro and rose 0.3 percent against the yen. The Labor Department said employers cut 35,000 workers from their payrolls in September, and August's job gains were revised up to 211,000. Economists expected a loss of 150,000 jobs last month, based on the median of 73 estimates in a Bloomberg News survey.

August Impact
The dollar's gains were driven more by the revision to August, and the September data may present an incomplete picture of the storms' impact, said Russell LaScala, a currency trader in New York at Deutsche Bank AG. "The only thing I was trading off of was the revisions,'' LaScala said. "It's difficult to put a lot of capital behind this data'' from September, he said. The rally may also be limited by lighter-than-usual trading before the holiday weekend. The Bond Market Association recommended bond markets close early today, at 2 p.m. New York time, and remain shut Oct. 10 in observance of the Columbus Day holiday. Stock markets will maintain normal hours. The U.S. currency rose 12 percent against the euro and 11 percent versus the yen this year as the Fed has raised its benchmark rate six times, to 3.75 percent. The European Central Bank has kept its rate at 2 percent for two years, while the Bank of Japan has maintained rates near zero since 2001. The yield on the December federal funds futures at the Chicago Board of Trade held at 4.12 percent, indicating traders see a 78 percent chance the Fed will lift its rate to 4.25 percent by year-end after boosting the rate to 4 percent Nov. 1.

ECB Bolsters Euro
The 12-nation European currency this week has been bolstered by a more aggressive stand by the ECB on rates and inflation, rising yesterday by the most since January 2004 versus the dollar after ECB President Jean-Claude Trichet said the bank may increase interest rates "at any time'' to prevent inflation from accelerating. "A lot of people will be picking up euros at these levels,'' said Mitul Kotecha, head of currency strategy in London at Calyon, the securities unit of Credit Agricole SA. "After the hawkish comments from Trichet, people may think this is the bottom of a range'' for the euro, and "it's a good level to get in.'' The Fed last month said the U.S. economy faces only a "near-term'' setback from Hurricane Katrina, the nation's most costly natural disaster, and pledged to stick to its policy of raising rates at a "measured'' pace.

'Supportive of Dollar'
"Expectations of further rate hikes in the U.S. over the rest of the year are very supportive of the U.S. dollar,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. "The market has already moved to price in the first 25 basis points rate hike in November, but has not yet fully priced in the second in December.'' The dollar may rise to $1.19 per euro in the coming three months, he said. The dollar has risen or fallen an average of 1.1 cents per euro on the day of the monthly jobs report in the past 12 months, according to data compiled by Bloomberg. St. Louis Fed Bank President William Poole on Oct. 4 described as "reasonable'' futures-market predictions that rates will rise another half-percentage point this year. UBS AG, the world's second-biggest currency trader, yesterday raised its forecast for the dollar versus the euro and the yen as it expects the Fed to continue to express concern about inflation. The bank expects the dollar to trade at $1.22 against the euro in one month and $1.24 in three months. UBS forecast it will trade at 112 yen in one month and 108 yen in three months.

Dollar Advances for Third Straight Quarter Against Euro, Yen

Oct. 1 (Bloomberg) -- The dollar capped its third straight quarterly gain against the euro and the yen, the longest winning streak since 2001, as the Federal Reserve maintained its pledge to raise interest rates at a "measured'' pace. The U.S. currency rose 2.3 percent against the yen and 0.7 percent versus the euro in the past three months as the Fed lifted its benchmark rate twice, to 3.75 percent. The European Central Bank has kept its rate at 2 percent for two years, while the Bank of Japan has maintained rates near zero since 2001. "People are willing to hold dollars,'' said Gerry Celaya, chief strategist at Redtower Research, a market research firm in Montrose, Scotland. "People are coming around to the view that the Fed is going to keep raising rates". The dollar strengthened 1 percent this week to 113.50 yen, its third straight weekly gain, at 5 p.m. yesterday in New York, according to currency dealing system EBS. The U.S. currency gained 0.1 percent to $1.2026 per euro. Celaya said the dollar will rally to $1.13 per euro and 125 yen by year-end. Redtower was the most accurate forecaster of foreign-exchange rates in the second quarter, according to a Bloomberg survey. The dollar was also bolstered as the yield advantage of Treasury notes over European government debt widened last quarter to the most in more than six years. The Fed last month said the U.S. economy faces only a "near-term'' setback from Hurricane Katrina, the nation's most costly natural disaster, and pledged to stick to its policy of raising rates at a "measured'' pace.

Yield Advantage
"The Fed has given all impressions that they intend to keep raising rates,'' said Tim Mazanec, senior currency strategist in Boston at Investors Bank & Trust Co. "That has spurred interest in the dollar.'' The yield advantage of 10-year Treasuries over German government bonds with a similar maturity is 1.19 percentage points, near the widest since July 1999. Versus Japanese government bonds, the spread is 2.84 percentage points. The gap with Japan has averaged 2.87 percentage points this year and reached as much as 3.27 percentage points on March 28.
"Japanese investors are buying the dollar to purchase overseas assets, such as Treasuries,'' said Luke Waddington, head of interbank currency sales Royal Bank of Scotland Plc in Tokyo. Japanese investment abroad is being led by a surge in purchases of foreign bonds. Japan's investors, including the central bank, held $683 billion of Treasuries in July, more than any other country, and they were net buyers of foreign bonds for all but two weeks this quarter, according to U.S. Treasury Department figures.

Dollar Story
The Fed's six quarter-point rate increases in 2005 helped spur a 10 percent gain in the dollar versus the yen and a 12 percent rally against the euro this year. "It really is a U.S. dollar story,'' said Clifford Bennett, chief strategist in Sydney at FxMax. The Fed will lift rates to 4 percent at its meeting on Nov. 1, he said. The National Association of Purchasing Management-Chicago said yesterday that its Business Barometer, which is based on a survey of executives in the region, rose to 60.5 this month from 49.2 in August. A number higher than 50 signals growth.
A separate survey showed U.S. consumer confidence fell by the most in 15 years. The University of Michigan's final index for September fell to 76.9 from 89.1 a month earlier, the same as was first reported on Sept. 16. The yen may be supported after Bank of Japan Governor Toshihiko Fukui said this week the central bank might stop pumping money into the economy as soon as April and forecast inflation may return after a seven-year absence. Fukui's remarks at a press conference in Osaka were the first time a BOJ official has indicated a timetable for ending its policy of holding interest rates near zero. "The yen is relatively undervalued,'' said Ashley Davies, a currency strategist in Singapore at UBS AG. Fukui "signaled the BOJ is surprisingly flexible in when it changes its policy.''
The yen may gain to 109 against the dollar in the next month, Davies said. Investors should increase bets the yen will gain versus the euro on speculation the BOJ will change its policy, Lehman Brothers Holdings Inc. said. Japan's currency has fallen about 2 percent against the euro in the past three months. "The yen looks too cheap in a world where the BOJ may be removing its zero-rate policy in the months ahead,'' wrote James McCormick, Lehman's head of global currency research in London, in a report sent to clients this week. "Yen fundamentals are increasingly too strong, and the currency too weak, to justify further declines.''