Dollar drop to affect rate rise

INTEREST rates in the US may not be increased next week as expected after the dollar tumbled yesterday following the release of US non-farm payroll report for the month.

The report showed employers in July hired the fewest workers this year.

Within a minute of the Labour Department report showing the economy added 32,000 jobs last month, compared to an expected 240,000, the dollar lost almost two cents against the euro and more than a yen versus Japan’s currency.

Ulster Bank economist Niall Dunne said the market is now rapidly reassessing Federal Reserve chairman Alan Greenspan’s recent assertion that the US downturn in the second quarter will prove temporary.

“If job creation has stalled - if companies in the US have sufficient capacity to meet current and expected demand - then the market will have to reassess its view on the timing of US interest rate hikes. In fact, next Tuesday’s Fed meeting might not now see a hike in US rates.”

He said this will have knock-on repercussions for US consumer confidence and consumer spending, which already fell to a three-year low in June.

“Probably the only people happy with this report are the Democrats in America, since the jobless recovery is now firmly back on the agenda,” he said.

“If ‘it’s all about the economy, stupid’, then America’s recovery is losing momentum at exactly the wrong time for Bush’s re-election hopes.

“And from a market perspective, If this trend continues, and American growth slows as sharply in Q3 as it did in Q2, then the dollar will be the biggest casualty, as the Fed will not raise interest rates rapidly in such a scenario.

“This fits with our fundamental call for further dollar weakness ahead (based on the scale of the current account deficit),” he said.

Currency investors “got caught on this one big time”, said Enrico Caruso, chief trader at currency hedge fund Tempest Asset Management in Newport Beach, California.

“A lot of people were expecting the numbers to be worse than the forecasts, but nobody was expecting it to be so bad.

“This raises serious questions about further rate hikes,” said Mr Caruso.

Against the euro, the dollar had its biggest one-day drop since January, trading at $1.2255 at 11:01am in New York from $1.2054 late yesterday.

The US currency dropped to 110.10 yen from 111.61, and tumbled against the Swiss franc, the British pound and the Canadian dollar.

“The only thing ahead of us is the $1.2270 mark against the euro,” Caruso said. “We might go there fairly soon. After that, it’s straight to $1.24.”

The yield on September federal funds futures fell three basis points to 1.53%, signaling traders to see a 36% chance the Fed will increase its interest-rate target to 1.75% at its September 21 meeting.

That figure is down from more than 70% yesterday.