Dollar higher against euro

Published August 7, 2005

NEW YORK, Aug 6: The dollar gained on the euro on Friday as a stronger-than-expected US jobs report fed expectations that the Federal Reserve will raise interest rates next week. Shortly before 2100 GMT, the euro was at $1.2355, compared to 1.2388 Thursday. The dollar rose to 111.89 yen from 111.20 a day earlier.

Data from the Labour Department showed that the US economy had created 207,000 new jobs in July, significantly more than the 180,000 forecast by analysts. Figures for the previous two months were also revised upwards, meaning the number of new jobs in June was 166,000, against a first estimate of 146,000, and 126,000 in May compared with the first estimate of 104,000.

US Treasury Secretary John Snow said the report was another significant indicator that America’s economy is expanding. The non-farm payroll report also showed average hourly earnings rose by six cents to $16.13 in July, the fastest gain in a year. Several economists said that could herald inflationary pressure.

The report raised the specter of another interest rate hike when Fed policymakers meet to review monetary policy Tuesday. As far as we stand, there is nothing stopping the Fed, said Kathy Lien, senior currency analyst at Forex Capital Markets.

A quarter-point hike to 3.5 per cent has already been priced into the market, said Lien. Today’s blockbuster report makes four per cent almost a certainty with the Fed possibly even overshooting to 4.25 per cent in coming months.

Was the jump in wages a one-shot wonder or does it portend accelerating labor costs? That is the unknown right now, said Joel Naroff, president of consulting firm Naroff Economic Advisors.

But if it does say the tightening labour market is finally flowing through to workers in terms of higher payroll costs, then the Fed may find even more reasons to continue the rate-hike programme.

Higher rates make the dollar more attractive on a yield basis relative to the currencies of the other industrialized nations. Prospects for higher rates had allowed the bruised greenback to rally back some 10 per cent in the first half of this year, but the rally has been showing signs of fatigue.

Sterling stood at $1.7789, from 1.7805 at the end of Thursday. The dollar was quoted at 1.2449 Swiss francs from 1.2385.—AFP

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