Bloomberg News

Dollar Reaches 10-Month High as Jobs Gains Dim Outlook for More Fed Easing

March 09, 2012

The dollar rose to a 10-month high versus the yen as a report showed U.S. job growth during the past six months was the strongest since 2006, dimming prospects for further Federal Reserve monetary stimulus.

The 17-nation euro remained lower as Greece’s use of collective action clauses forcing investors to take losses under the nation’s debt restructuring will trigger payouts on $3 billion of default insurance. Canada’s dollar and Mexico’s peso erased losses against the greenback amid a brighter outlook for consumer spending in their biggest trading partner. Norway’s krone tumbled as the government and central bank stepped up verbal intervention to contain the currency’s strength.

“The Fed is probably looking at the labor data today and seeing how strong it is and thinking that even if they do support the economy with more stimulus, it might not be in the same fashion as it has done before,” said Brian Kim, a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc. “Better U.S. data is helping the dollar against the euro, sterling and yen.”

The dollar added 1.1 percent to 82.46 yen at 5 p.m. in New York, it earlier touched 82.65, the strongest since April. The greenback rose 1.1 percent against the euro to $1.3123.

Cumulative outflows from the euro in the past five days are one and a half times as strong compared with the average during the past year, according to Bank of New York Mellon iFlow data. Inflows into U.S. debt today are twice as strong as average.

Treasuries Slide

Treasuries fell for a third day, adding to the premium investors get investing in U.S. debt versus relative Japanese securities. The two-year yield spread was 20 basis points, or 0.2 percentage point.

The yen has declined 6.9 percent in the past three months, the worst performer among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar fell 0.5 percent, and euro slid 2.7 percent.

Higher-yielding currencies rose against the euro and yen as implied volatility of three-month options for nine currency pairs within Group-of-10 nations was 10.2 percent, according to the Deutsche Bank CVIX Index. That compares with an average of 12.4 percent during the past six months.

“It looks like euro and yen are now the favorite funding currencies and are consequently under the hammer,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York. “Euro-yen is flat for now as there is no clarity in the choice between yen and euro at this point.”

Borrowing yen at almost zero percent to invest in Australia’s dollar, Mexico’s peso, Brazil’s real and South Korea’s won returned 0.6 percent today, according to data compiled by Bloomberg. The trade using euros would also result in a 0.6 percent gain compared with a 0.5 percent loss using dollars.

U.S. Trading Partners

The Dollar Index (DXY), which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, advanced 1 percent to 79.959.

Canada’s dollar erased a decline versus its U.S. counterpart as the better than expected payrolls in its largest trading partner outweighed a weaker than expected domestic report.

The Canadian currency was little changed at 99.05 cents per U.S. dollar. It touched C$1.0029 on March 6, the weakest level since Feb. 27.

Mexico’s peso rose 0.3 percent to 12.6425 per dollar.

The krone weakened the most among the 16 major currencies against the dollar after Trade Minister Trond Giske said its strength was hurting exports. Verbal intervention has increased in an attempt to contain the krone’s ascent after the currency climbed to a nine-year high of 7.3884 per euro this month.

The krone tumbled 2 percent to 5.7007 per dollar, and sank 0.8 percent to 7.4805 versus the euro.

Economic Data

U.S. nonfarm payrolls increased by 227,000 in February after rising by a revised 284,000 the prior month, data from the Labor Department showed today. The unemployment rate held at a three-year low of 8.3 percent.

“The economy is back on the road to recovery, and what we need most desperately in this economy, which is new jobs, that seems to be well on its way,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp. “This is further confirmation that the North American economy continues to grow at a faster-than-expected pace and pushing unemployment rates lower.”

Fed Chairman Ben S. Bernanke’s comments in congressional testimony last week damped speculation the central bank will introduce another round of asset purchases.

“We have seen some positive developments in the labor market,” Bernanke said in prepared testimony to the House Financial Services Committee in Washington. He said keeping monetary stimulus is warranted even as the unemployment rate falls.

Fed Moves

The Fed has bought $2.3 trillion of bonds in two rounds of so-called quantitative easing from December 2008 until June 2011. Central bank officials at their January meeting were keeping open the option of a third round of bond purchases in case the economy weakens or inflation falls too low.

The central bank has kept its benchmark interest rate between zero and 0.25 percent since 2008.

Greece said that 95.7 percent of bondholders would participate in its debt swap after it used an option to force investors to participate. The government said holders tendered 152 billion euros ($199 billion) of Greek-law bonds, or 85.8 percent, in response to the offer to swap their holdings.

A total 4,323 credit-default swap contracts can now be settled after the International Swaps & Derivatives Association’s determinations committee ruled the use of CACs is a restructuring credit event. Before the ruling, Greek swaps rose to a record $7.68 million in advance and $100,000 annually to insure $10 million of debt for five years.

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Allison Bennett in New York at abennett23@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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