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Friday June 2, 2006 - 19:35:25 GMT
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FOREX-Dollar slumps, soft US jobs data point to Fed pause

FOREX-Dollar slumps, soft US jobs data point to Fed pause

Updates prices;, adds details, quotes)

By David McMahon

NEW YORK, June 2 (Reuters) - The dollar tumbled across the board on Friday after weaker-than-forecast job creation in May boosted market expectations that the U.S. Federal Reserve will pause its campaign of interest rate hikes.

The net 75,000 non-farm payroll jobs created last month was below the expectations of even the most bearish economists and suggested slowing economic growth going forward. For details, see [ID:nN01411729].

Inflationary pressures as measured by average hourly earnings in the report were also soft, helping strengthen the view that the Federal Reserve might not raise interest rates at its June 28-29 meeting.

"There are few redeeming features in these labor market figures," said Richard Franulovich, currency strategist at Westpac Banking Corp. in New York.

Franulovich added that he expected the dollar to remain under pressure, particularly given that the European Central Bank may raise interest rates by up to a half-percentage point next week, narrowing the dollar's rate advantage.

Ken Landon, senior currency strategist at JP Morgan in New York, reckoned that the employment data "really cements the case" for the Fed to pause in its rate-raising campaign later this month.

In afternoon trading on Friday, fed funds futures contracts were pricing in roughly an even money chance the Fed will raise rates at its June 28-29 meeting, down from 68 percent before the jobs data. Earlier this week, markets were pricing in an 80 percent chance the Fed would raise rates later this month.

The euro was up almost 1 percent on the day at $1.2930 and touched a peak of 1.2939, its highest since May 15 and not far below that day's one-year high of $1.2971.

Against the Japanese yen , the dollar was down 0.9 percent on the day at 111.60 yen, retreating from around 112.75 yen before the data and almost two yen below a one-month high of 113.37 hit on Thursday.

The dollar was also down more than 1 percent against both sterling at $1.8840 and the Swiss franc at 1.2065 francs .

Economists surveyed in a Reuters poll had an average forecast of 175,000 new jobs created in May.

But that survey was taken on May 26. Later, some banks, including Goldman Sachs and Calyon, trimmed their forecasts to 150,000.

"The FX market response is what you would expect from such a weaker number -- lower dollar across the board," said Greg Anderson, senior currency strategist at ABN AMRO in Chicago.

Also on Friday, Chicago Fed President Michael Moskow said that the latest economic data have generally been positive, adding that inflation was at the top end of his comfort zone, but that he saw price pressures staying contained.

The federal funds rate currently stands at 5 percent, but the diminishing chances of the Fed raising again in June stand in contrast to the strengthening expectations the European Central Bank will raise benchmark rates next week.

The ECB's benchmark refinancing rate stands at 2.5 percent. With growth and inflation in the 12-nation bloc picking up, some observers say the ECB might even raise rates by 50 basis points. (Additional reporting by Jamie McGeever, Steven C. Johnson, Nick Olivari and Kevin Plumberg)

© Reuters 2006. All Rights Reserved.


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