Dollar Up On Good US News; 1st Time Since Crisis
By RIVA FROYMOVICH
Of DOW JONES NEWSWIRES
NEW YORK -- The dollar rallied sharply against the euro and yen Friday on a stronger-than-expected U.S. employment report, which came to shift the way currency markets have been trading for at least the past year.
For the first time since the economic crisis gripped financial markets, when investors rushed into the safety of the U.S. currency and bonds in times of fear, the dollar actually benefited from good U.S. news.
Friday afternoon in New York, the euro was at $1.4169 from $1.4350 late Thursday. The dollar was at Y97.48 from Y95.44, according to EBS. The euro was at Y138.20 from Y136.91. The pound was at $1.6671 from $1.6775. The dollar was at CHF1.0825 from CHF1.0651.
Nonfarm payrolls declined 247,000 in July, the Labor Department said Friday, the smallest drop since last August and below the 275,000 decline economists in a Dow Jones Newswires survey had expected.
Usually, as a safe-haven asset, the dollar had declined throughout this financial crisis against riskier, higher-yielding currencies, such as the euro, when spurts of positive data boosted market sentiment -- even if it is was positive U.S. data.
"[The] report may be so strong that it prompts players to rethink assumptions about the pace of the recovery, the timing of the [Federal Reserve's] normalization of interest rates and ultimately the relationship between the stock market and the dollar," said Michael Woolfolk, senior currency analyst at Bank of New York Mellon.
Essentially, on Friday, for the first time in a long time, investors traded the dollar on interest rate expectations, which hasn't happened since the world's major central banks began their aggressive easing campaigns. This occurred in conjunction with a rise in U.S. Treasury yields and as fed funds futures began pricing in an interest rate hike by January.
The dollar's gains were sharp.
The euro fell more than two U.S. cents from an intraday high to a one-week low of $1.4154, despite the gains in U.S. stocks, which had supported euro advances all year.
"[The] tight inverse correlation between the dollar and equities is potentially easing, and we are not seeing wholesale dollar selling," said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank in New York. "If so, relative economic performance will become increasingly important, and on that basis, we still expect the dollar can outperform the euro and the yen in the months and quarters ahead."
The euro sell-off came just days after the common currency established a new high for the year, $1.4445 on Monday. At that point, the market was significantly long the euro, but it failed to break the technical level of $1.4450.
"Those longs were just frustrated, and basically profit-taking occurred," said Mike Moran, senior foreign exchange strategist at Standard Chartered Bank in New York.
The next technical barrier for the euro is $1.4130, he said.
Meanwhile, the dollar gained to more than a seven-week high of Y97.79 against the safe-haven yen, rising nearly three yen from an intraday low.
Moran said a break of Y98.60 would accelerate the greenback's rally further.
The positive jobs report encouraged traders to fund bets in higher-yielding, riskier currencies with yen. Japan's economy is seen as keeping interest rates low for an extended period, ensuring its status as a lower-yielding funding currency.
"The appropriate trade is to avoid euro versus dollar and focus on key risk crosses like short-yen versus the dollar," said Alan Ruskin, head of international strategy at RBS in Greenwich, Conn., adding that emerging market currencies, such as the Brazilian real, are also preferred.
Sophia Drossos, a currency strategist at Morgan Stanley in New York, also stressed that investors will likely take this opportunity to buy more cyclical currencies tied to commodity demand, like the real, as well as currencies that have a strong link to the U.S. economy. Indeed, the Mexican peso gained to an 11-week high in intraday trade versus the dollar, which fell as low as MXN12.8970.
---By Riva Froymovich, Dow Jones Newswires; 212-416-2217; riva.froymovich@dowjones.com |
