Saturday May 8, 2004 - 11:14:34 GMT
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INVESTICA Ltd - www.investica.co.uk
Employment data revives dollar
Stronger than expected employment figures for the second month running will reinforce market optimism over the US economy and currency, while expectations of a June Fed tightening will also underpin the dollar. The US currency will still have to battle with fundamental weaknesses, primarily due to the widening budget deficit and weak current account position. The high level of oil prices will also tend to widen the trade account and confidence in the dollar could quickly erode again. In this context the flow of funds into the equity market and the degree of overseas selling in the bond market will be crucial factors over the next few months.
Unemployment 5.6% April (5.7% March)
Non-farm payrolls +288,000 Apr (+337,000 Mar)
ISM index manufacturing 62.4 Apr (62.5 Mar)
ISM services 68.4 Apr (65.8 Mar)
Jobless claims 315,000 week ending May 1 (340,000 prev)
The dollar weakened to a low of EUR1.2180/US$ during the week, but robust economic data helped underpin the US currency and it strengthened to beyond 1.20 after the US employment report on Friday reaching a high of 1.1870. The US data retained a firm tone during the week, particularly for the labour market. The manufacturing PMI index dipped marginally to 62.4 in April from 62.5 the previous month, but the services sector index strengthened to 68.4 from 65.8 in March.
The most important data release for the week was the employment report and there was again a larger than expected increase with payrolls rising 288,000 in April after an upwardly revised 337,000 increase for March. The unemployment rate also fell to 5.6% from 5.7%. The work-week figures were slightly disappointing, but the figures overall will strengthen market optimism over the US economy. Jobless claims fell to 315,000 in the latest week from 340,000 previously.
Interest rate expectations will remain very important for the US currency. The Fed left interest rates unchanged at this week’s meeting, but the deflation threat was dropped and the Fed is preparing the markets for a tightening. There will be further uncertainty whether the Fed will tighten in June or August, but the strength of the employment report suggests that a June increase is now the more likely option and inflation data will be watched closely in the short term.
These positive dollar factors will be offset by the doubts over longer-term dollar fundamentals. There will be further concerns over the US current account and budget deficits, especially with Fed chairman Greenspan warning that overseas financing of the deficit could falter. High oil prices will also tend to widen the trade deficit and depress growth. There has also been evidence that major US investor Warren Buffett has continued to buy foreign currencies due to expectations of a medium-term dollar decline. The inflow of foreign capital into the US stock and bond markets will be vital and there will be further doubts over the long-term performance.
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