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Friday May 2, 2008 - 20:49:48 GMT
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FOREX NEWS-Dollar surges broadly as jobs report less grim

Fri May 2, 2008 4:24pm EDT

(Recasts; updates prices, changes byline)

By Lucia Mutikani

NEW YORK, May 2 (Reuters) - The dollar scaled two-month highs against the yen and a basket of currencies on Friday after an unexpectedly small drop in U.S. nonfarm payrolls left investors hoping any U.S. recession would prove a shallow one.

News that the struggling economy shed only 20,000 jobs in April also supported views that the Federal Reserve would refrain from cutting interest rates again, provided economic data and financial markets did not deteriorate further.

Fed rate cuts totaling 3.25 percentage points since mid-September have eroded the allure of dollar-denominated assets to investors seeking higher returns, undermining the greenback against the high-yielding euro and Austrlian and New Zealand dollars.

"All the numbers during the last few weeks suggest that the economic situation in the U.S. is not worsening or getting better," said Paresh Upadhyaya, portfolio manager at Putnam Investments in Boston. "All signs point to a shallow recession, but we could see a prolonged period of weakness once the U.S. emerges from the recession."

The dollar surged to a two-month peak of 105.69 yen <JPY=>, and has gained nearly 1 percent against the Japanese currency on the week. It was last up 0.9 percent at 105.40.

The New York Board of Trade's dollar index, which charts the dollar's performance against a basket of six currencies, climbed to two-month peaks at 73.698 .DXY. It was last around 73.534, on track for it's third straight weekly gain.

Labor Department data showed U.S. employers cut 20,000 jobs in April, marking the fourth straight month of contraction inemployment. Economists polled by Rueters had been looking for payrolls to decline by 80,000 after an upwardly revised loss of 81,000 jobs in March.

The unemployment rate also eased to 5.0 percent from 5.1 percent in March. For details, see [ID:nN02551119]


With economic data continuing to beat market expectations, analysts said it was becoming more likely that the Fed would keep its key overnight lending rate at 2 percent for a while.

This would support the dollar against the euro, especially as perceptions rise that the European Central Bank will be forced to ease monetary policy at some point this year amid increasing signs of slower growth in the euro zone.

"As long as interest rate differentials continue to move sideways, to even move to the benefit of the dollar, that could help support the dollar," said Upadhyaya.

"The downside to the dollar is limited because of the direction of interest rates and some signs of robust foreign direct investment and a pickup in equity flows."

The euro <EUR=> fell to $1.5362, the lowest level since March 24, according to Thomson Reuters data. It traded back up at $1.5425 at midday, down 0.3 percent on the day.

For the week, the euro has lost 1.3 percent against the dollar, declining for a second straight week. But the enthusiasm for the dollar is not shared by all, with some traders dismissing the move as a temporary correction.

"This is profit-taking. Others might be thinking that the dollar has reached a bottom and it might be time to start buying it. They could be right in the near term," said Firas Askari, head currency trader at BMO Capital markets, Toronto.

"Over the long term, the U.S. economy is not going to rebound for quite some time."

The dollar rose to a nine-week high against the Swiss franc to 1.0606 <CHF=>, before edging back down to 1.0563 francs. It was on track for its largest weekly gain since December.

The dollar was also mildly supported by an unexpected rise in U.S. factory orders for March and news about the injection of additional liquidity by major central banks to stabilize credit markets.

The Fed said it would step up the amounts offered in some cash auctions to financial institutions, while the European Central Bank and Swiss National Bank will boost their auctions of dollar funds by European banks. [ID:nL02554470] (Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis)

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