Dollar Trades Near 3-Month High Versus Yen Before U.S. Job Data

By Min Zeng

June 1 (Bloomberg) -- The dollar traded near a three-month high against the yen before a U.S. government report forecast by economists to show job growth accelerated last month.

Signs of strength in the labor market may add to evidence of a rebound in the world's largest economy, reducing speculation on an interest rate cut by the Federal Reserve this year. The dollar in May posted its biggest monthly advance versus the yen since August on economic reports showing advances in consumer confidence, housing and manufacturing.

``The dollar will rally nicely on a strong payroll report,'' said Alan Kabbani, a senior currency trader in Charlotte, North Carolina, at Wachovia Corp. ``It should break through 122 yen.''

The dollar traded at 121.73 yen at 6:06 a.m. in Tokyo after touching 121.98 yesterday, the highest level since Feb. 12. The U.S. currency rose 1.8 percent against the yen in May. The dollar traded at $1.3452 against the euro after dropping 0.21 percent yesterday. It rose 1.45 percent against the euro in May for the biggest monthly gain since February 2006, rebounding from an all- time low of $1.3681 set April 27.

U.S. employers probably added 135,000 to their payrolls last month, compared with 88,000 in April, according to the median forecast of 82 economists surveyed by Bloomberg News. The Labor Department report is due at 8:30 a.m. in Washington.

Some strategists and traders said the payroll number may trail economists' forecasts after a private job report showed employment increased last month less than economists forecast.

Companies in the U.S. added 97,000 workers to payrolls, ADP Employer Services said May 30. The median forecast of 14 economists polled by Bloomberg News was for an increase of 120,000. The gain followed a revised boost of 61,000 in April.

Lowered Forecasts

Lehman Brothers Holdings Inc. and Action Economics are among firms that lowered forecasts for the Labor Department's payroll data following the private jobs report.

Derivatives trading on tomorrow's payroll report suggested the number will be smaller than Bloomberg's forecast. Traders and investors expect U.S. employers added 121,200 non-farm workers in May, according to an auction today of economic derivatives by the Chicago Mercantile Exchange.

``The downside risk on the payroll report is increasing,'' said Kathy Lien, chief currency strategist in New York at DailyFX.com. ``Leading into the payroll report, some people are going to adjust their positions by paring down some dollar longs.'' A long is a bet on a currency's advance.

Carry Trades

The yen may extend its decline against the dollar and the euro as a rally in global stock markets boosts investors' appetite for risk and encourages buying of higher-yielding assets financed by loans in Japan, known as carry trades.

Asian stocks rose to record yesterday, and European equities climbed to a six-year high. U.S. stocks also advanced. Japan's benchmark interest rate, at 0.5 percent, is the lowest among major economies. It compares with 5.25 percent in U.S., 3.75 percent in countries that use the euro and 5.5 percent in the U.K.

``The yen has been the weak sister,'' said Grant Wilson, a currency trader in Pittsburgh at Mellon Financial Corp. ``As equities rebound, people are more willing to take on more risk, and that bodes well for the carry trades.''

The Japanese currency traded at 163.72 per euro after dropping 0.21 percent yesterday toward the record low of 164.29 yen set on May 29.

Chicago Index Advances

Traders pared bets on a Fed rate cut yesterday after the National Association of Purchasing Management-Chicago said its business barometer rose to 61.7 in May from 52.9 the prior month. The median forecast of 60 economists in a survey by Bloomberg was for a reading of 54. Readings greater than 50 signal expansion.

``Manufacturing is picking up more than expected, and it adds to the sentiment that the Fed will be on hold for a while,'' said Brian Taylor, chief currency trader at Manufacturers & Traders Trust in Buffalo, New York.

A Commerce Department report on May 24 showed sales of new homes increased in April the most in 14 years as prices declined. A separate report for April from the department showed goods meant to last several posted their longest streak of monthly gains in almost two years. The New York-based Conference Board reported on May 29 that an index of consumer confidence last month increased more than economists forecast.

Fed Rate Outlook

The yield on Eurodollar futures for December rose to 5.290 percent yesterday from 5.255 percent a day earlier. The contracts' value at settlement is based on the interest rate on three-month bank deposits, which is influenced by the federal funds rate target.

The dollar dropped against the euro earlier yesterday as revised figures from the Commerce Department in Washington showed the U.S. economy grew at an annual rate of 0.6 percent from January through March, the smallest pace in four years.

To contact the reporter on this story: Min Zeng in New York at mzeng2@bloomberg.net .

Dollar Still in Range after Mixed Data, Edges Higher against Yen

Dollar spiked lower after US Q1 GDP was revised lower than expected from 1.3% to 0.6%, versus consensus of 0.8%, primarily due to smaller inventory accumulation and greater imports. That was the lowest GDP growth in 4 years. Meanwhile, Fed's preferred inflation gauge, core PCE deflator, rose at 2.2% yoy, same as previously estimated. However, downside was limited after stronger than expected Chicago PMI rebounded strongly to 61.7 in May, matching Mar's high with all sub-components up from Apr. Construction spending also beat expectation by rising 0.1% in Apr while jobless claim is solid at 310k. After all, the weakness in Q1, though worse than expected, is still priced in by the markets. Dollar is still in range against Euro, and even edges higher against yen, ahead of the more current economic data in NFP, ISM and PCE tomorrow.

On the other hand, Canadian dollar surges to new 30 year high of 1.0664 after stronger than expected Q1 GDP which grew at an annualized qoq rate of 3.7% versus expectation of 3.5%, comparing to prior upwardly revised 1.5%. The CAD is supported by expectation of further rate hike from BoC, in particular after a hawkish press release earlier this week and strength in the economy is providing a solid case for another near term hike from BoC in July.

The European economy remains strong overall

While in the United States some sectors of the economy might gain momentum in the second half of the year, in Europe the growth process is still trending upward. The European Central Bank is positioning the move rates in the near future, as the currency remains supported but with caution.

Consumer confidence still supportive in the U.S.

Latest data appears to confirm that the economy in the Unites States is only mildly moderating, with some parts of the growth process gaining momentum and others showing tentative sings of stabilization. In fact, while in April durable goods orders increased below expectations at 0.6% (market was forecasting an increase of 1%), March orders were revised to 5% from earlier estimate. April has been the fifth increase over the past six months and it supports durable orders to the highest level since December 2006. Orders declined for transportation equipment (-1.3%), civilian airplanes (-10.7%) and motor vehicles. Gains were seen in orders for defense aircraft and parts. Core orders, non-defense capital goods excluding aircraft, moved 1.2% after gaining 4.4% in March. Unfilled orders, an indicator to future activity, jumped 1.8% pairing March gain. Inventories rose by 0.5%, the most in seven months. Shipments increased 1.9%, after rising 1.3% in March.


Angelo Airaghi is a Commodity Trading Advisor, registered with the National Futures Association and the Commodity Futures Trading Commission. He has been an active professional since 1990 working for major international financial companies. In the past 10 years, Angelo Airaghi has been an analyst and commentator for national and international media.

This article contains the following sections:

Consumer confidence still supportive in the U.S.

The European Central Bank might rise rates in the near future

Euro ¡s still in trading range

by Angelo Airaghi [Guest Analyst]

5/28/2007