Thursday, August 31, 2006

Dollar Hits 6 -week High Vs. Yen Ahead Of Payrolls Report

By Wanfeng Zhou

The dollar rose to a six-week high against the yen and gained against the
euro Thursday, showing limited reaction to a mixed batch of economic news as
traders adjusted positions ahead of Friday's U.S. employment report.

The greenback bounced off a one-week low against the euro -- touched earlier
in the session in reaction to the European Central Bank's decision to keep
interest rates unchanged and its hint at further rate increases ahead.

"I think what you're seeing is the market squaring up a little bit ahead of
[Friday's] payrolls," said Greg Anderson, senior foreign-exchange strategist
at ABN Amro. "The market has been very short of dollars. It's very difficult
to predict what payrolls would be. Most players in the market don't want to be
holding a big position going into payrolls." A short position is essentially a
bet that prices will decline.

In New York trading, the euro was quoted at $1.2795, compared with $1.2831
late Wednesday. The dollar changed hands at 117.34 yen, compared with 117.11
yen, after touching 117.46 yen, the highest level since July 19.

The British pound traded at $1.9023, compared with $1.9043. The dollar was
last at 1.233 Swiss francs, compared with 1.2276 francs.

The euro fetched 150.16 yen, compared with 150.31 yen, after touching a
record high of 150.75.

The Labor Department will report on the August nonfarm payroll figures
Friday. Economists expect a gain of about 130,000 jobs, including government

Matthew Strauss, senior currency strategist at RBC Capital Markets, said the
dollar reversed course after the euro failed to break above the 1.2880 level.

"The turnaround that we saw had very little to do with economic data today,
it was more based on technical trading than anything else," he said.

A mixed batch

The Commerce Department said core consumer prices, as measured by the
personal consumption expenditure price index, excluding food and energy, rose
0.1% in July, the smallest gain since December. Economists were expecting a
0.2% gain.

In the past year, core prices have risen 2.4%, matching the biggest gain in
11 years and well above the Federal Reserve's implied target zone of 1% to 2%
for core inflation.

The inflation figure "fits the Fed's scenario nicely, suggesting that
inflationary pressures are beginning to moderate," said Brian Dolan, director
of research at

This morning's economic reports showed "there's still no real justification
for the Fed to consider tightening its monetary policy for the time being,"
added Andy Cottrill, a trader at CMC Markets.

In a separate report, the Commerce Department said demand for U.S.-made
factory goods fell 0.6% in July on a large drop in orders for transportation
goods. Excluding the 10.1% decline in transportation orders, factory orders
rose 1.1% in July. Economists had expected a 0.9% drop.

Meanwhile, business activity in the Chicago region decelerated slightly, but
continued to expand at a moderate pace, according to NAPM-Chicago.

The Chicago purchasing managers index fell to 57.1% in August from 57.9% in
July, the private group said Thursday. The decline was in line with
economists' expectations, according to a survey conducted by MarketWatch.
Readings over 50 indicate growth in the region.

Elsewhere, initial claims for state unemployment benefits fell by 2,000 to
316,000 for the latest week.

The strong increase in productivity, or output per hour of work, seen over
the past decade is likely to continue for some time, said Fed chief Ben
Bernanke. He did not address the economic outlook or factors that might impact
the Federal Reserve at its next meeting to set monetary policy on Sept. 20.

After 17 straight meetings in which it implemented quarter-percentage-point
increases in benchmark interest rates, the Fed held interest rates steady at
5.25% earlier this month.

Traders are now pricing in a 12% chance that the Fed will lift its target
for overnight rates to 5.5% from 5.25% after either the Sept. 20 meeting or
the Oct. 24/25 meeting, interest-rate futures show. The odds stood at 20% late

Trichet seeks 'strong vigilance'

The ECB kept interest rates on hold at 3%, after hiking by a quarter-point

earlier this month. The bank has lifted its base rate four times in the past
10 months.

ECB President Jean-Claude Trichet said in prepared comments that "strong
vigilance" is needed toward inflation risks and that monetary policy is
"accommodative." He said a further withdrawal of accommodation would be
warranted if its economic projections are confirmed.

Trichet's comments "have been very hawkish. We see the reappearance of the
word 'vigilance,'" said Kathy Lien, chief strategist at FXCM. "As a central
bank that never likes to surprise, the ECB is telling us that they feel that
growth will continue to rise and it remains essential for them to contain

Elsewhere, the Eurostat statistics agency said inflation in the euro zone
was 2.3% in August, above the bank's target of 2%, though below July's reading
of 2.4%. Money growth also has been running ahead of the central bank's

The European Commission's euro zone economic indicator fell more than
forecast, to 106.7 points from an upwardly revised 107.8 in July. The decline
was on weaker industrial confidence, though consumer confidence was unchanged.

Yen under pressure

The Japanese currency weakened to a record low against the euro Thursday,
with the latest bout of selling precipitated by a surprisingly weak industrial
production report.

Japanese industrial production fell 0.9% in July, against expectations of a
0.8% rise, reinforcing the market's view that the Bank of Japan may refrain
from raising interest rates further this year.

The yen has taken a beating lately after a soft Japanese consumer inflation
report damped the prospects of another rate rise this year in the world's
second-largest economy.

Japanese Finance Minister Sadakazu Tanigaki said earlier this week that the
government will be closely watching currency movements in the wake of the
euro's sharp rise against the yen.

Dow Jones Newswires


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