Dollar at lowest vs. euro since December 2009 - the Mesh Report

Dollar at lowest vs. euro since December 2009

the Mesh Report Staff May 4, 2011 0

By Sarah Turner and Deborah Levine, MarketWatch

NEW YORK (MarketWatch) — The dollar fell further against the euro and other major currencies on Wednesday, after an estimate of private-sector jobs growth proved weaker than forecast.

The greenback had been under pressure before the data as reports came out saying Portugal has negotiated an international bailout worth €78 billion.

The soft ADP number and signs of stabilization in the European debt crisis are “supporting the overall ‘sell the buck’ mojo,” said Andrew Busch, global currency strategist at BMO Capital Markets.

The dollar index , which measures the greenback against a basket of six currencies, fell to 72.792 from 72.942 before the data and from 73.127 in late North American trading on Tuesday.

The euro rose to $1.4916, up from $1.4831 in the previous session. It rose to the highest since December 2009.

Against the Japanese yen, the dollar slipped 0.7% to ¥80.59.

The British pound rose to $1.6552, from $1.6470 Tuesday. The Bank of England meets Thursday.

Private U.S. employers added 179,000 jobs last month, according to payroll-handling company ADP. The data come two days before the more closely followed Labor Department’s employment report for April.

U.S. central bankers have indicated that without stronger job growth they have little impetus to increase interest rates.

“U.S. employers added fewer new positions last month helping to keep the horizon free from any signs of monetary tightening, adding to recent downside pressure on the dollar,” said Andrew Wilkinson, senior market analyst at Interactive Brokers.

The dollar pared losses slightly after the Institute for Supply Management’s services-sector index weakened more than predicted in April. The data turned U.S. Treasury yields lower, pushing the dollar down more against the Japanese yen which tends to be more sensitive to movements in U.S. yields.

The bailout package for Portugal led to a sharp decline in the cost to insure debt of the peripheral European countries that have been in the spotlight since last year.

“Many see the risk premium in the periphery fading, at least in the near term,” said strategists at Brown Brothers Harriman.

That also boosts the potential for the European Central Bank to continue on its hawkish bend when it meets Thursday. Expectations of further rate increases have supported the currency and overshadowed the possibility that the debt problems of Greece, Ireland, Portugal and maybe others could slow growth for the region.

Rising commodity prices and worries that they will spark broader inflation increases is likely to be grounds for ECB President Jean-Claude Trichet to indicate he’s inclined to raise rates in coming months.

Inflation worries “are likely to prompt a hawkish response from Trichet in the post meeting press conference tomorrow and indicate that the next 25bps [basis points] hike is likely to take place in June or July, with the rates market beginning to lean towards June,” Brown Brothers’ strategists said. “With U.S. data likely to be on the soft side this morning, a break of the $1.49 level is likely to trigger a run towards $1.51.”

That’s pushed up yields on German bunds, making them more attractive relative to U.S. Treasury notes, bringing interest rate spreads back to the forefront of investors’ minds.

Commodity influence

The dollar had been in positive territory during Asian trading hours, which analysts attributed to sliding commodity prices.

“We are continuing to see a growing number of commodity complexes struggle, as investors begin to appreciate that the macro environment going into the second half of the year — one marked by high inflation and interest rates — will be far less hospitable for the asset class,” said analysts at MF Global.

Amid weaker commodity prices, the Australian dollar traded at $1.0833, from $1.0856 late Tuesday.

The recent gains for the U.S. dollar follow the currency’s plumbing of 2008 lows early in the week, and some strategists believe that the U.S. currency will soon resume its downward trend.

“Short of powerful risk aversion, short-covering or pity, it is still very hard to see a sustained U.S. dollar rally unfolding soon. That said, the pace of U.S. dollar decline since mid-April was simply unsustainable,” said currency strategists at RBC Capital Markets.

Sarah Turner is MarketWatch’s bureau chief in Sydney.Deborah Levine is a MarketWatch reporter, based in New York.

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