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Thursday January 31, 2008 - 22:04:10 GMT
Reuters - www.reuters.com

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FOREX NEWS-Dollar edges up vs euro, all eyes on jobs data

Thu Jan 31, 2008 4:34pm EST

(Recasts, updates prices, adds comments)

By Steven C. Johnson

NEW YORK, Jan 31 (Reuters) - The dollar crept higher against the euro on Thursday as dealers braced for a U.S. jobs report that may shed light on how close the economy is to recession.

On Wednesday, the dollar tumbled broadly after the Federal Reserve again cut its benchmark interest rate, this time by half a percentage point.

In fewer than 10 days, the central bank cut rates by 1.25 percentage points, pushing the benchmark U.S. lending rate to 3 percent, among the lowest in the developed world.

But dealers began taking profits on that move overnight, with fears mounting that a credit crisis that began in the United States was now spreading overseas, muddying the near-term direction for the dollar.

"We're primarily trading off of risk aversion and the view that the credit crisis may be spreading," said Michael Malpede, senior currency strategist with Man Global Research in Chicago.

"There's the perception that the Fed is getting ahead of the curve on the economy and Europeans may be lagging a bit. ... We may be getting to the bottom of our crisis and they may be just about to confront theirs," he said.

Late afternoon, the euro had drifted down to $1.4864 <EUR=>, about 0.1 percent below its level late Wednesday.

Overnight, the euro hit a global session high of $1.4914, a little more than a cent away from its record high of $1.4966.

"There's quite a bit of indecision right now. It's not an easy market to trade," said Jeff Sakamoto, interbank trader at Union Bank of California in Los Angeles.

That's especially so ahead of Friday's U.S nonfarm payrolls report, expected to show the economy added 63,000 jobs in January after creating only 18,000 jobs in December.

But weekly jobless data on Thursday that showed the biggest spike in more than two years kept traders guessing.

Against the yen, the dollar moved in lock-step with U.S. stock indexes, falling 0.1 percent to 106.33 yen <JPY=>.

The greenback fell 0.2 percent to 1.0801 Swiss franc <CHF=>, near a record low of 1.0759 francs hit earlier.

MORE TROUBLE AHEAD

The month has been a cruel one for the dollar, which suffered amid a worsening U.S. economic outlook and the Fed's sharp interest rate cuts.

The dollar was down 4.4 percent against the yen in January, on track for its worst monthly performance since March 2004. The euro gained 1.9 percent this month, while the dollar was headed for a 4.7 percent slide against the Swiss franc.

The Fed has slashed rates by 2.25 percentage points since September, with 1.25 percent of that coming over an eight-day span in January.

That leaves the federal funds rate at 3 percent, lower than those in all developed countries save Japan and Switzerland. And things may not get better soon.

"The continued implosion of interest rate spreads has taken out much near-term support for the dollar and still makes for a compelling case for both the euro and the yen," said David Mozina, head of FX strategy at Lehman Brothers in New York.

That may even be so if Friday's payroll report beats expectations. Sakamoto said a strong January jobs gain would ease concern about recession and push traders into riskier trades that favor high-yield currencies such as the Australian dollar.

Still, the situation in Europe was hardly better. Euro-zone inflation rose to an all-time high in January while economic sentiment plunged to two-year lows, setting up a scenario of stagflation, one of the biggest banes for investors.

The longer the European Central Bank holds its benchmark rates steady at 4 percent, "the darker the European growth outlook becomes," BNP Paribas strategists said in a note. "Hence, the euro has little long-term support and is facing increasing downside risks." (Additional reporting by Kevin Plumberg; Editing by Leslie Adler)

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.

 

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