Thursday, August 31, 2006

Dollar May Gain on Speculation U.S. Added Jobs at a Faster Pace

By Chris Young and Ron Harui

Sept. 1 (Bloomberg) -- The dollar may strengthen for a second day against the euro and a third versus the yen on speculation a government report will show the U.S. economy added the most jobs in five months.

Projected gains in employment may prompt investors to restore bets the Federal Reserve will revert to raising interest rates after last month breaking a two-year cycle of increases. The dollar yesterday climbed as a government report showed U.S. consumer spending in July rose the most since January.

``A stronger jobs number will give the dollar a boost,'' said Stephen Koukoulas, chief Asia-Pacific strategist at TD Securities Ltd. in Sydney. ``We're expecting reasonable strength in payrolls numbers and that will probably damp expectations the U.S. economy is slowing too abruptly.''

The dollar traded at $1.2805 at 10:50 a.m. in Tokyo compared with $1.2813 in late New York yesterday. It may rise to $1.27 after the jobs report, Koukoulas said.

The U.S. currency bought 117.26 yen from 117.40 yesterday, when it reached a six-week high of 117.50 yen.

Employers in the U.S. added 125,000 workers to payrolls in August, according to the median forecast of 78 economists surveyed by Bloomberg News.

The unemployment rate fell to 4.7 percent from 4.8 percent in July, the survey showed. The Labor Department plans to release its report at 8:30 a.m. in Washington.

Too Aggressive

The dollar has weakened the first Friday of the past four months as the jobs numbers have fallen short of economists' estimates.

U.S. consumer spending rose 0.8 percent in July, following an increase of 0.4 percent in June, the Commerce Department reported yesterday.

Stronger-than-expected jobs numbers will support the dollar because investors have too aggressively cut bets the Fed will raise rates again, said Koukoulas.

The Fed held its overnight lending rate between banks at 5.25 percent on Aug. 8 after 17 straight increases. Interest-rate futures show the odds of another quarter-percentage point increase by Dec. 31 are about 12 percent from 100 percent in July.

IMF

The yen's decline may stall on speculation China will allow faster appreciation of the yuan after International Monetary Fund Managing Director Rodrigo de Rato today said in an Internet-media briefing in Washington the nation needs a currency that reflects an economy that had the quickest pace of growth in a decade.

A stronger yuan increases Chinese consumers' buying power for Japanese products and helps to damp China's export-led expansion. Exports made up about 35 percent of China's gross domestic product last year.

``There's talk China may increase the value of the yuan,'' said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo. ``This would push the yen higher.''

The yen traded at 150.33 per euro from 150.42 yesterday, when it reached 150.73, the weakest since the euro's 1999 debut. It may move between 149.50 and 151.00 versus the euro and 117.00 and 118.00 against the dollar today, he said.

China's trade surplus was a record $14.5 billion in June from $13 billion the prior month, pushing economic growth to 11.3 percent in the second quarter, the fastest in more than a decade.

`Strong Vigilance'

The euro may be supported before European reports today that are likely to show unemployment in the 12-nation region held at a record low in July and its economy grew the most in six years in the second quarter.

The currency is heading for a weekly gain against the dollar and the yen on speculation faster economic growth will prompt the European Central Bank to raise interest rates. President Jean- Claude Trichet yesterday pledged ``strong vigilance'' on inflation, a phrase previously used to signal a rate increase. He will attend a conference in Italy tomorrow.

``He's likely to reiterate `strong vigilance,''' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The bias for the euro is positive.''

The jobless rate of the dozen countries sharing the euro held at 7.8 percent in July, according to the median forecast of 28 economists surveyed by Bloomberg.

The $10 trillion economy expanded 0.9 percent in the second quarter, matching the preliminary figure released Aug. 14, according to a separate Bloomberg survey.

Eurostat, the European Union's statistics office in Luxembourg, releases both reports at 11:00 a.m.

The ECB yesterday left its key rate at 3 percent, as expected by 45 of 46 economists surveyed by Bloomberg News. Trichet said at a news conference rates are ``still low'' and the central bank expects inflation to stay ``elevated.''

Interest-rate futures indicate traders expect the ECB to raise its main rate to at least 3.50 percent this year. The yield on the December contract gained 7 basis points last month to 3.63 percent.

The contracts, traded on the London International Financial Futures Exchange, settle to the three-month interbank offered rate for the euro, which has averaged 16 basis points above the ECB's benchmark rate since the 1999.

To contact the reporter on this story: Chris Young in Sydney at cyoung12@bloomberg.net ; Ron Harui in Singapore at rharui@bloomberg.net

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