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Friday April 7, 2006 - 20:54:30 GMT
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FOREX-Dollar rallies as U.S. yields support

FOREX-Dollar rallies as U.S. yields support
Fri Apr 7, 2006 4:50 PM ET

(Updates prices, adds comment, changes byline)

By Kevin Plumberg

NEW YORK, April 7 (Reuters) - The dollar rallied on Friday, completely reversing its fall to two-month lows this week, after a strong U.S. jobs report reinforced the view the Federal Reserve will raise interest rates at least one more time.

On Friday, the yield spread of 2-year U.S. Treasury debt over same-maturity euro zone paper stretched to the widest in a month, lending support for the dollar.

Furthermore, following the March jobs data, financial markets put the probability of the Fed raising rates by a quarter percentage point two more times to 5.25 percent at 60 percent, compared with a roughly one in three chance on Thursday, according to rate futures.

By late afternoon, the euro was down more than a percent from late Thursday at $1.2092, shedding more than 2 cents from seven-month highs of $1.2333 in the last 24 hours.

The euro's move lower began on Thursday when European Central Bank President Jean-Claude Trichet poured cold water on expectations for a May rate rise after the ECB left rates at 2.50 percent following a monetary policy meeting.

"There's enough damage done for now to the euro following Trichet and decent U.S. jobs data, but we should see some follow through next week," said Kenneth Landon, G10 currency strategist with JPMorgan.

The benchmark yield on the 10-year Treasury note finished Friday at 4.96 percent, the highest since June 2002. See [ID:nN07489441].

"If we go towards 5.10 percent or 5.15 percent on the yield, I think euro/dollar can easily break down again to $1.1850 or so," Landon added.

The dollar index <.DXY>, a measure of the greenback's performance against a group of major currencies, had fallen to two-month lows on Wednesday of 88.44, but recovered to 89.62 by the end of Friday as traders mulled the likelihood of further Fed rate hikes.


The U.S. government said 211,000 workers were added to payrolls in March, not far from Wall Street's median forecast for a 190,000 increase. See [ID:nN07236518].

The dollar rallied sharply against the major European currencies and the Japanese yen, in line with a rise in U.S. bond yields.

"It was a one-two punch: the dollar benefiting from a reassessment of the Fed outlook, while at the same time the next ECB rate hike had been pushed out to June," said Jay Meisler, principal of, an online forum for traders and investors.

Against the yen , the dollar was up 0.5 percent at 118.39 yen. Against the Swiss franc , the dollar rose 0.9 percent at 1.3013 francs.

Some analysts noted that the jobs data were strong enough to suggest the U.S. economy is growing at a good clip and should therefore support the dollar.

But others cautioned that the U.S. currency's structural weaknesses could be exploited if the market's focus shifts to the trade gap and the potential for central banks to slow their buildup of dollar reserves.

Market positioning could also be an obstacle to further dollar strength, particularly against the euro. The latest data from the International Monetary Market showed speculators extended their net long euro position to the largest in 17 months.

"At this point, the market is likely to consolidate and look to next week's trade balance and retail sales data to determine the direction of the pair for the near term," said Kathy Lien, chief strategist at Forex Capital Markets.

(Additional reporting by Amanda Cooper)


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