Jobs data knocks the US dollar down

Euro

The European currency was under pressure against the dollar after a slew of manufacturing surveys, at the beginning of the week shortened by Labour Day holiday in the U.S., showed the euro zone economy improving but at a slower pace than the U.S.

The Reuters Euro zone Purchasing Manufacturing index came out at 49.1 in August from 48.0 in July, edging closer to the 50 level that would mark a return to growth. The euro fell to 4½ month lows against the greenback as optimism grew that the U.S. and Japanese economies would recover faster than their euro-zone counterparts.

Nevertheless, the U.S. dollar failed to gain much impetus after the release of strong ISM data. A stronger than expected manufacturing report from the Institute for Supply Management failed to spark a dollar rally given jobs are still being lost in the sector.

The August manufacturing index rose to 54.7, the highest since December last year, from 51.8 in July, easily beating economists' expectations for a reading of 53.8.

Midway through the week the euro remained steady against the greenback after crashing to $1.0767 levels, it's lowest since April. Dollar's brief rise was mainly contributed to buoyancy in the stock markets based on growth expectations. Data out of U.S. failed to push the greenback higher, mainly due to profit taking ahead of employment report at the end of the week.

Federal Reserve's 'beige book' report, an snapshot of conditions across the United States, confirmed recent data indicating the U.S. economy strengthened in July and August. End of the week saw the dollar falling broadly after a poor weekly jobs report frightened investors ahead of the all important August employment data, which is critical in determining the health of the U.S. economy.

Weakness in the dollar came after claims for unemployment benefits rose above 400,000, an important level that indicates weakness in job growth.

Claims rose by 15,000 to 413,000 in the week ended Aug. 30 - above economists' expectations for a small decline to 390,000. Given that employment is viewed as the last critical piece of the U.S. recovery, the markets ignored a barrage of other strong economic reports highlighting second-quarter productivity, August service sector growth and July factory orders.

The euro surged to a two-week high on the last trading day of the week due to a sombre jobs report which cast doubt on the economic recovery in the United States and showed that the US cut jobs at their fastest pace since March.

The August jobs report showed non-farm payrolls fell 93,000 versus forecasts for a 12,000 rise, while the jobless rate declined to 6.1 percent
from 6.2 percent. Analysts where expecting no change.

Range for the week: $1.0850 - $1.1350

Yen

The yen started the week on a firm footing mainly due to a surprise revelation that Japan had not carried out yen-selling intervention in August despite it appreciating late last month due to growing demand from foreign investors wanting to buy Japanese stocks.

Speculation surrounding the reasons behind non-intervention ranged from John Snow's visit to Asia and an upcoming report by the Treasury to the congress on currency manipulation, which is due by mid October.

Still many traders were reluctant to drive the yen higher after earlier comments from Japan's forex chief, Zembei Mizoguchi, who said that recent movements in the foreign exchange market had been speculative and warned of action if moves turn volatile. "It's not appropriate for the market to be volatile or to overshoot," he added.

Furthermore, uncertainty continued in the market over Tokyo's future policy on currency intervention after non-committal statements from U.S. Treasury Secretary John Snow on his visit to Japan.

Snow praised the government's reform programme but avoided any criticism of its currency policy by saying the U.S. welcomed economic growth anywhere. He also reiterated his belief that flexible exchange rates were best for the global economy.

Midway through the week the dollar fell below the critical 116 yen level after the White House reiterated that currency rates are best set by markets and intervention should be kept to a minimum. Market players viewed this clarification as a green light to buy the Japanese currency. The Japanese currency was further assisted by data pointing to economic recovery in Japan and capital inflow from Japanese assets.

A finance ministry survey released showed that Japanese companies had increased spending on plant and equipment by 6.4 percent in the April-June quarter from the same period a year earlier,
its first rise in seven quarters.

The survey also showed that business sentiment at large Japanese firms improved in July-September period. Capital flows data indicated overseas investors continued to pour funds into Japanese stocks, buying a net 326 billion-yen ($2.8 billion) in the last week of August.

As the dollar fell to a 3 ½ month low of 115.75 due to strong data, the Japanese authorities patience finally ran out and they then intervened heavily in the foreign exchange markets, pushing the dollar up by more than one yen. Sources said the Central bank was seen repeatedly buying the dollar above 116-yen.

Japan's top Financial diplomat, Zembei Mizoguchi, declined to comment on whether the Japanese authorities had intervened, saying only that the Government's foreign exchange policy was unchanged. Meanwhile, U.S. Treasury Secretary John Snow let out a series of warnings against the governments' heavy involvement in the currency market.

Range for the week: 115.00 - 120.00

Sterling

Sterling recovered against the dollar, at the start of the week, mainly due to its rise against the euro after a spate of buoyant British data increased prospects of an economic recovery in the country.

Data out showed a renewed surge in British house prices and a recovery in the construction and engineering sectors, reinforcing expectations the Bank of England would hold interest rates unchanged when it meets later in the week.

Midway through the weak, sterling was trading below the $1.5700 levels, hovering close to its weakest level since late April of $1.5616, mainly due the dollar's gains against other major currencies.

Economic data released showed Britain's dominant services sector growing at its fastest rate since January 2001 with the CIPS/Reuters services activity index at 57.0 in August, a fifth consecutive month of expansion.

However, the pound was not gaining much support from the figures mainly due to the fact that investors were keeping to the sidelines, eyeing an ongoing judicial inquiry into the death of government weapons expert David Kelly.

Sterling ended the week positively, pulling away from four-month lows against the dollar, after the Bank of England left interest rates unchanged at 3.5 percent, increasing expectations that Britain's rate cutting cycle may be over.

Further helping the pound was a weak monthly jobs report. This helped sterling to surge to a two week high, and news on the closure of the first phase of inquiry into David Kelly's death, which will reopen on September 15.

Range for the week: $1.5700 - 1.6200