Saturday July 3, 2004 - 11:05:14 GMT
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INVESTICA Ltd - www.investica.co.uk
Employment data hurts dollar
The dollar will be unsettled by the weak US June employment report, especially as there is a risk that US interest rate expectations will be revised. In particular, speculation over a 0.5% August rate hike is liable to fade. A gradual Fed tightening is still realistic and would tend to curb US dollar losses by helping to avoid bond-market turbulence. A combination of weak growth and rising inflation would, however, be negative for the US currency and the net dollar risks have increased. With fears that equity financing will be weak over the next few months, it will be difficult to avoid a weaker dollar, although heavy selling pressure should be avoided.
US data releases
Unemployment 5.6% Jun (5.6% May)
Non-farm payrolls +112,000 Jun (+235,000 May)
ISM index manufacturing 61.1 Jun (62.8 May)
Consumer confidence 101.9 Jun (93.1 May)
Jobless claims 351,000 week ending Jun 26 (350,000 prev)
The dollar and Euro battled unsuccessfully for advantage for most of the week, but the Friday US employment report was decisive in weakening the US currency with a decline beyond 1.2250 to a low of 1.2325.
Earlier in the week, the crucial Fed decision met market expectations with a 0.25% increase in the Fed funds rate to 1.25%. The statement accompanying the report was also broadly in line with expectations. The Fed retained the word measured, but the central bank also gave itself scope for greater flexibility by stating that policy will be adjusted if there is a shift in economic conditions.
The employment data will have a significant market impact. The June payroll rise was much lower than forecast at 112,000 compared with expectations of 240,000 while the May and April increases were both revised downwards.
The other economic reports over the week hinted at a pause in rapid growth within the industrial sector and there will be some speculation over a wider economic slowdown unless the remaining July data is firmer. The ISM manufacturing report edged down to 61.1 in June from 62.8 the previous month while there was evidence of a slowdown in the auto sector. The consumer confidence index was stronger than expected, but there has been some evidence of a slowdown in spending, especially for autos, and this area will be watched very closely over the next few weeks. Ahead of the payroll report, market sentiment was split between a 0.25% and 0.5% rate increase at the August meeting. After the payroll report, expectations over a 0.5% increase will fade and there could also be speculation that the Fed might not increase at all.
A gradual Fed tightening would tend to stabilise bond markets and underpin the US currency and this is still a realistic outcome, but the July data will be under close scrutiny. The dollar is liable to be undermined by any downward shift in interest rate expectations, especially if growth appears to be faltering and the chances of monetary policy being dollar supportive have declined.
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