Dollar Wins on Euro, Pound Weakness

by: Grace Cheng

From 5.5% to 5.7% - that’s how much unemployment rate has increased in the US in July according to Friday’s release of non-farm payrolls. This came in worse than an expected reading of 5.6%, and marks the highest unemployment rate in more than four years. The US dollar initially spiked up against other major currencies like the Euro and Swiss franc following the report which showed that 51,000 jobs were cut in July, versus a forecast loss of 75,000 jobs, but then it dipped slightly when traders took another glance at the unfavorable unemployment rate, before turning up again.

Actually, on the whole, the jobs report is not as bad as many had predicted. Job losses accumulated since the beginning of this year till July amounted to 463,000, and this decline isn’t as severe as that reported for the same period during the recession in 2001 where an average of 145,000 jobs were cut each month.

Americans should brace themselves for the unemployment rate to head towards 6%, and prepare for a tough period of job-finding. Thursday’s data showed that the number of Americans filing initial claims for unemployment benefits last week rose to the highest level in more than five years.

This trading week in the forex markets marks the third straight week of rally of the US dollar versus the Euro and Swiss franc as oil fell further and Eurozone data came in worse than expected. The greenback also gained against the Australian dollar and New Zealand dollar as poor economic data from these two countries indicated that interest rates in these countries may have to be reduced. Amazingly, the dollar has held up fairly well amidst the upheaval in the financial markets, just like some parts of the US economy. I say “held up” because USD’s gains are more the result of weakness in other countries’ economies rather than on the US’s intrinsic economic strength.

The British pound has been a loser, dropping 240 pips against the USD this week on worsening economic data. Recession is now a real threat to the UK. A UK manufacturing index reported Friday fell to 44.3 (45.5 expected), the lowest since December 1998, from 45.9 in June. In addition, house prices fell the most since 1991 in July and consumer sentiment plunged to a record low.

More action will come next week as the Fed, the ECB and BOE announce their interest rate decisions.

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