US jobs data ends dollar rally

Euro

The dollar kicked off the week on a soft tone against the euro as meeting between U.S President George W. Bush and German Chancellor Gerhard Schroeder did not produce any surprise in foreign exchange market, with both leaders repeating their official lines on forex policy.

However, soon luck changed for the dollar after good U.S manufacturing data raised hopes for a strong reading in a key U.S. jobs figure due on Friday. The Institute for Supply Management's index of manufacturing activity for February came in at 61.4, down from January's twodecade
high of 63.6.

However, the reading was well above 50, signalling robust expansion in the sector. Financial markets focused more on the employment component of the ISM index which showed a rise to 56.3 the highest since late 1987.

Non-Farm payroll data from the United States due later in the week were viewed as potentially pivotal for the dollar as an improvement in the jobs market could hasten a possible tightening by the Federal Reserve.

Meanwhile, in Euroland the Reuters survey of manufacturing activity in the eurozone showed the main index at 52.5 in February, unchanged from January.

As the week progressed, the dollar soared to three-months high against the euro, when it gained 2.35 cents to log its biggest single-day gain in absolute terms since the launch of the single currency five years ago on growing optimism about a pickup in the long dormant U.S. job market and on a breach of key technical support levels.

U.S. Federal Reserve Chairman Alan Greenspan comments added to the dollar's bullish tone after he said 'the currency depreciation that we have experienced of late should eventually help to contain our current account deficit as foreign producers export less to the United States'.

In addition, he added that the current level of the benchmark fed funds rate, now at 1 percent, was accommodative for spurring U.S. growth but at some point would have to rise. Meanwhile, dollar showed little reaction to an ISM service sector report that showed expansion but at a slower-than-expected pace.

The ISM nonmanufacturing index declined to 60.8 in February from 65.7 a month earlier. In Eurozone, German industrial orders fell two percent in the month of January as the strong euro and weak consumer demand confounded hopes of a small increase, dimming the prospects for a recovery in Europe's largest economy.

Toward the end of the week, dollar shed its early gains against the euro after European Central Bank kept its interest rate steady at 2.0 percent.

Furthermore, ECB President Jean-Claude Trichet said euro zone monetary policy remains appropriate, dimming rate cut expectations. Financial markets were on alert for comments from Trichet indicating a European interest rate cut may be imminent.

Instead, he cited favourable growth prospects and gave the impression that rates were fine where they are. The dollar came under additional pressure after weekly government data on U.S. jobless claims offered no surprises.

The number of American signing up for first-time jobless benefits slipped to 345,000 in the week ended Feb 28, exactly as expected. On the last trading day dollar fell sharply across the board after the much awaited U.S. payrolls data showed far fewer new jobs were added in February, diminishing chances of an interest rate hike in 2004.

The U.S Labour Department reported only 21,000 jobs were created last month, compared with an increase of 97,000 jobs in January. The jobless rate held steady at 5.6 percent in February. Economists had forecast the addition of 125,000 jobs and for the jobless rate to remain at 5.6 percent.

Market expectations of an increase in official interest rates, which would make yields on U.S. assets more attractive, was a factor behind recent dollar strength.

However, those expectations had been partly conditional on a strong U.S. employment report, which failed to materialise. The weak payrolls number showed that the job market still lags other parts of the U.S. economy that have been showing steady signs of improvement in recent months.

Next week's data should show some improvement on the previous month, however, there is little that will stand on the way of a renewed falling dollar trend. U.S Producer Price index for the month of Jan is expected to increase by 0.4 percent, Feb Retail Sales to increase by 0.6 percent.

University of Michigan Confidence data is expected to come at 95.0 compared to 94.4 in previous month.

Range for the week: $1.2150 - $1.2650.

Japanese Yen

Dollar started the week trading above 109-yen, as Japan's heavy yen selling intervention since last year may have finally borne fruit.

Japan stepped up yen selling intervention this year, in an effort to prevent the currency from rising rapidly and damaging the nation's export-led recovery.

Figures showing an expansion in U.S. manufacturing in February and a rise in a key measure of employment activity underpinned the dollar. Japanese FinanceMinister Sadakazu Tanigaki said there is no change in Japan's currency policy and that the market is undergoing an adjustment of dollar-short positions.

Meanwhile, dollar showed little reaction to Federal Reserve Chairman Alan Greenspan's rare straight-forward comments on Japan's intervention in the currency market.

He said, 'the current performance of the Japanese economy suggests that we are getting closer to the point where continued intervention at the present scale will no longer meet the monetary policy needs of Japan.' He also said it seemed likely that Tokyo's rate of accumulation of dollar assets 'will have to slow at some point and eventually cease' once the current situation of declining prices, or deflation, is past.

The dollar extended its month-long rally against the yen and hit a four-month high of 112.30 on growing speculation that Japan would continue intervening in the market.

Japanese Finance Minister Sadakazu Tanigaki defended Japan's stance, telling reporters on Friday that balancing stability and flexibility was important and that he saw no difference between Greenspan's view on Tokyo's policy and Japan's own views.

Range for the week: 109.50 - 114.50

Sterling

Sterling was well supported against the dollar after evidence of the strong British consumer sector raised expectations that Bank of England would raise interest rates.

The BoE Monetary Policy Committee was not expected to hike rates yet when it was schedule to meet on Thursday, but markets expected tightening in coming months.

Data showed consumer credit surged by nearly two billion pounds in January, the strongest rise in eight months. An unexpected fall in Britain's service sector purchasing managers' index for February did not significantly dent the market's rate hike expectations as analysts said the sector remained strong.

The latest CIPS/ Reuters monthly service index fell to 59.5 from 59.8 in January. A number above 50 denotes expansion, below 50 contraction. However, sterling failed to hold ground against the dollar, which staged a sharp rally against all major currencies on expectations of a pick-up in the long-dormant U.S. jobs market.

Furthermore, sterling slipped lower against the dollar after the Bank of England opted to leave interest rates steady at 4.0 percent. By the end of the week, sterling surged more than two cents against the dollar as a surprisingly weak U.S. jobs report sent the U.S. currency tumbling across the board.

Range for the week: $1.8250 - $1.8750