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Dollar Dips as Market Adjusts Rate Hopes

Sun Aug 8, 2004
By David McMahon

TOKYO (Reuters) - The dollar slipped on Monday, extending heavy losses made after a far-weaker-than-expected U.S. employment report cast doubt over the health of the economy and the pace at which the Federal Reserve would raise interest rates.

U.S. non-farm payrolls added only 32,000 jobs in July, according to data released on Friday, while the Labor Department cut its tally of job growth for May and June by 61,000.

Markets had expected 228,000 new jobs in July, according to a Reuters poll.

"The data are going to hang over the dollar until the next payrolls numbers, and we're probably going to see some more weakness," said Jake Moore, forex strategist at Barclay's Bank.

"I think we're going to see this more against the euro, and also the Aussie and sterling, where rates have the potential to move higher, because the trajectory of rates could now come under question in the (United) States."

The dollar fetched around 110.30 yen as of 8:15 p.m. EDT Sunday, compared with around 110.48 in late New York trade and a near two-week low of 109.82 touched on Friday.

The euro was around $1.2270, versus 1.2280. It surged around 1.8 percent against the dollar on Friday to its highest level in three weeks after the payrolls data raised worries the Fed may slow its tightening timetable.

Federal funds futures markets are now only pricing in a maximum of three quarter-percentage-point hikes for the rest of the year. Before the jobs data, four moves were on the cards.

Attention is now firmly squared on the Fed's Open Market Committee meeting on Tuesday, when it will likely raise interest rates to 1.5 percent from the current 1.25 percent.

Traders said the market was now less confident that the Fed would follow this up with an additional rate rise in September.

Against sterling, the dollar was trading at around $1.8414, little changed from late Friday's level.

Analysts said the yen may have less to gain than it's major rivals from further falls in the dollar, partly due to a market perception that a recent surge in oil prices to record highs will hurt Japanese shares and put the brakes on Japan's economic recovery.

Japan's per-capita consumption of oil is only half that of the United States, but it is more dependent on imported oil.

However, some say the yen may gain support from Japanese gross domestic product (GDP) data for April-June, due on Friday, which will likely show a ninth straight quarter of expansion, the best streak since 1995-97.

Japanese machinery orders data due at 0500 may provide further clues on the state of the economy.

Orders likely rose 1 percent in June from the previous month, growing more slowly but maintaining an upward trend, economists said in a Reuters poll on Friday.

The Bank of Japan is widely expected to maintain its ultra-easy monetary policy at a two-day meeting that ends on Tuesday.








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