DOLLAR MAY EXTEND DROP AGAINST EURO BEFORE U.S. PAYROLL REPORT

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Dollar May Extend Drop Against Euro Before U.S. Payroll Report

By Ye Xie
Enlarge Image/Details

June 6 (Bloomberg) -- The dollar may extend its drop against euro before a government report forecast by economists to show the U.S. lost jobs in May for a fifth consecutive month.

The currency fell from a four-week high versus the 15- nation euro yesterday after European Central Bank President Jean-Claude Trichet said an interest-rate increase in July is ``possible.'' The yield advantage of two-year German bunds over Treasuries increased to the widest since 1993, making dollar- denominated assets less attractive.

``If the fundamental data in the U.S. turns weak, the interest rate differential will be working in favor of the euro,'' said Paresh Upadhyaya, who helps oversee about $50 billion in currency assets as a senior vice president at Putnam Investments in Boston.

NOTE: UPADHYAYA IS A MAJOR PERSONALITY IN THE PUTNAM INVESTMENTS IN BOSTON.

The dollar traded at $1.5597 per euro at 6:06 a.m. in Tokyo, after falling 1 percent yesterday, the most since March. It touched $1.5365 before Trichet's comments, the strongest level since May 8. The yen was at 165.22 per euro, following a 1.7 percent drop yesterday. Japan's currency traded at 105.93 per dollar, after falling 0.7 percent and touching 106.43, the weakest level since Feb. 28.

The ECB kept its main refinancing rate at a six-year high of 4 percent, where it has been since last June. The Federal Reserve has cut its target seven times since mid-September to 2 percent to stave off a recession.

Two-year German bunds yielded 2.11 percentage points more that comparable-maturity U.S. Treasury notes yesterday, up from 1.89 percentage points on June 4. It was the biggest increase in the spread since March 25.

Euribor Futures

The implied yield on the September Euribor futures contract jumped 0.30 percentage point to 5.23 percent as traders added to bets the ECB will raise borrowing costs to curb inflation.

``It's not excluded that, after having carefully examined the situation, that we could decide to move our rates by a small amount at our next meeting,'' Trichet said at a press conference in Frankfurt after yesterday's rate decision. ``I don't say it's certain. I said it's possible.''

The U.S. Dollar Index on ICE futures in New York, which tracks the greenback against the currencies of six major trading partners, erased some of the gains that came after Fed Chairman Ben S. Bernanke said on June 3 that the central bank is ``attentive'' to the implications of the currency's decline. The index fell 0.5 percent to 73.038 yesterday.

Bernanke `Undone'

``Trichet has undone any good work Bernanke put on for the dollar,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``It pulls us back to the reality that we not only get a U.S. story, but also a European story driving the euro-dollar.''

The pound fell yesterday against the euro after the Bank of England kept its key interest rate at 5 percent. Sterling dropped as much as 0.9 percent to 79.64 pence per euro, the lowest level since May 27. Against the dollar, the pound traded at $1.9583, after increasing 0.1 percent yesterday.

The ECB has cited accelerating inflation as a reason for not cutting rates as the U.S. economic slowdown spreads to Europe. The inflation rate reached 3.6 percent last month, the fastest since the euro's inception in 1999.

U.S. employers probably shed 60,000 jobs in May after a drop of 20,000 in the prior month, according to the median forecast of 79 economists surveyed by Bloomberg News. The Labor Department's report is due at 8:30 a.m. in Washington.

NOTE: U.S. ECONOMIC SLOWDOWN AFFECTS THE MAJORITY.

Fed Rate Outlook

Futures on the Chicago Board of Trade showed a 69 percent chance the Fed will raise the target rate for overnight lending between banks by at least a quarter-percentage point by December, compared with 55 percent odds a month ago.

The dollar has lost 11 percent against the euro since the central bank started lowering the fed funds target from 5.25 percent on Sept. 18. The U.S. currency has increased 3 percent since touching the all-time low of $1.6019 per euro on April 22 as the Fed signaled rate cutting is over.

Citigroup Global Markets Inc. reversed its bet yesterday on the euro's decline. The 15-nation currency will form a ``double bottom'' on the trend line tracking its rally since November, a pattern that would suggest an increase to $1.63 in eight to 10 weeks, wrote Tom Fitzpatrick, New York-based global head of currency strategy at Citigroup, and his London-based colleague Shyam Devani in a research note.

``You have the Fed and Treasury in the business of platitudes regarding rates and currency but doing nothing,'' the analysts wrote. ``On the other side, you have the ECB, who, like it or not, has been consistent and true to its word.''

The dollar will strengthen to $1.49 against the euro and trade at 105 yen by the end of the year, according to the median forecast of 39 economists surveyed by Bloomberg.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net
Last Updated: June 5, 2008 17:11 EDT


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