Saturday April 2, 2005 - 09:25:58 GMT
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INVESTICA Ltd - www.investica.co.uk
Dollar survives payroll disappointment
Dollar survives payroll disappointment 02-04-05
The dollar strengthened to 1.2860 against the Euro, but was then subjected to a correction, retreating towards 1.30 with trading initially subdued due to the Easter holidays. The Euro strengthened briefly after the US payroll report on Friday, but was unable to hold the gains above 1.30 and retreated back to 1.29 in New York.
The US employment report was significantly weaker than expected with the payroll gain held to 110,000 for March from a downwardly-revised 243,000 for February. In part, this was weather related, but there will still be disappointment over the pace of job creation. The unemployment rate fell to 5.2% from 5.4% and the hourly earnings rate was slightly higher than expected at 0.4% which will ease the impact of slower than expected employment growth.
Elsewhere, the US Chicago PMI index was much stronger than expected with an increase to 69.2 in March from 62.7 the previous month. There were also strong rises for the orders and employment indices. The national ISM manufacturing index only recorded a slight increase, but the services-sector report, released ahead of schedule, was stronger than expected and the price components strengthened.
Personal income and spending data were in line with expectations and the increase in prices was also controlled. Fed interest rate expectations will remain extremely important.
Overall, the data will dampen expectations of a more aggressive Fed tightening slightly and this will lessen the potential for strong dollar gains. Yield considerations will, however, still provide some backing for the US currency and the Fed does have some concerns over inflation. The Fed will, therefore, continue to push short-term interest rates higher over next 2-3 months at least. A 0.5% rate increase at the next meeting should not be discounted, although a 0.25% increase is more likely.
Oil prices will need to be watched carefully as a sustained increase in prices would act as a drag on consumer spending and would also put upward pressure on inflation. This combination would be liable to slow the US economy at the same time as inflation rises. This could cause serious difficulties for the Fed, potentially weakening the dollar, and would also put upward pressure on the US trade deficit which would reinforce negative dollar sentiment.
The Euro-zone data remained uninspiring with the PMI index for the manufacturing sector weakening to 50.4 in March from 51.9 the previous month, dangerously close to signalling a contraction in the sector. The German unemployment figures also remained weak with a further sharp monthly increase. The Euro-zone weakness will make it difficult for the Euro to take advantage of any short-term dollar vulnerability.
There will still be the potential for diversification into the Euro from dollar reserves and this will provide important background support for the Euro throughout the next few months.
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