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Dollar Slips as U.S. Jobs Report Erodes Outlook for Higher Rates

Bloomberg, April 4, 2015

The dollar fell after a weaker-than-expected U.S. labor report prompted investors to push back their timetable for an interest-rate increase from the Federal Reserve.

The U.S. currency slid against most of its major peers as the release showed companies added 126,000 jobs in March, the fewest since December 2013. Traders now are almost evenly split on a jump in borrowing costs by December.

“This kind of number is a perfect excuse to sell the dollar,” said David Donabedian, chief investment officer in Atlanta at Atlantic Trust Private Wealth Management, which oversees $26.2 billion. “You’re getting some people reappraising the path of Fed rate increases and pushing it back. But I think as the year evolves we’re going to see that the U.S. economy does fine — not spectacular, but solid.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, tumbled 0.9 percent to 1,180.58 as of 11:02 a.m. in New York.

The dollar declined 1 percent to $1.0993 per euro, and dropped 0.7 percent to 118.89 yen.

Federal fund futures give a 51 percent probability the central bank will lift borrowing costs from virtually zero at the December gathering, according to data compiled by Bloomberg. That’s down from 59 percent yesterday.

‘Weak Number’

The payrolls increase was lower than the most pessimistic forecast in a Bloomberg survey and followed a 264,000 gain a month earlier that was smaller than initially reported, the Labor Department said. The median forecast in a Bloomberg survey called for a 245,000 increase. The unemployment rate held steady at 5.5 percent.

“This number is not a good sign — there’s no way around this one,” Alvise Marino, an emerging-markets currency strategist at Credit Suisse Group AG in New York, said in a phone interview. “However, you need to see a lot of more these negative signs before the whole story changes.”

The U.S. central bank is scrutinizing incoming data as it looks to increase borrowing costs for the first time in almost nine years. The Fed removed a commitment to being “patient” on rates at its March meeting, even as it slashed projections for the target rate this year.

Policy makers meet again at the end of April. Richmond Fed President Jeffrey Lacker said this week that there’s a “strong” case to raise rates at the central bank’s June 16-17 meeting.

A Morgan Stanley index showed on Thursday that the central bank will increase its benchmark interest rate in about 8 months.

Divided Market

“The market’s very divided on the timing of a Fed rate hike, so certainly I think this will push out expectations for when the Fed first raises interest rates,” said Omer Esiner, chief market analyst at the currency brokerage Commonwealth Foreign Exchange Inc. in Washington. “Probably toward the end of the year.”

Confidence that the central bank will eventually lift borrowing costs by December has helped the dollar stay the best performer among developed-market currencies over the past year, with an 18 percent advance against a basket of peers measured by Bloomberg Correlation-Weighted Indexes.

The euro has declined 7.5 percent in the same period as the European Central Bank resorted to unprecedented monetary stimulus under the quantitative-easing strategy to kick-start a stagnant economy and stave off deflation.

“The ECB’s not going stop doing QE for now,” Credit Suisse’s Marino said. “I have the highest conviction on euro-dollar. It doesn’t make sense for the euro to be higher. Structurally-speaking, the number doesn’t change the overall picture.”