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Dollar Hits 2004 Highs on Jobs Outlook
Wed Mar 3,11:02 AM ET Add Business - Reuters to My Yahoo!
By Kyle Peterson
CHICAGO (Reuters) - The dollar hit its highest levels this year against the euro, yen and Swiss franc on Wednesday, with gains triggered by rising optimism over U.S. job growth and expectations this would mean higher U.S. interest rates.
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The dollar's surge this week is largely the result of Monday's Institute for Supply Management manufacturing report that showed a bigger-than-expected rise in the employment component. With February' U.S. payrolls report due on Friday, traders are guessing that those data could be robust as well.
The dollar showed little reaction to an ISM service sector report on Wednesday that showed expansion but at a slower-than-expected pace. The employment component also showed a decline in the pace of expansion.
"The one area of concern is the employment index which moderated in the month, which suggests continued subdued job growth," said Sal Guatieri, senior economist at BMO Financial Group in Toronto. "That will likely take some wind out of the U.S. dollar's sails and shore up Treasuries because the fixed-income market has been concerned about a strong employment report on Friday."
The ISM non-manufacturing index declined to 60.8 in February from 65.7 a month earlier. Economists' median forecast had called for the index to fall, but only to 63.0.
In mid-morning U.S. trade, the euro was down 0.54 percent at $1.2155 after touching a three-month low of $1.2105. The dollar was trading nearly unchanged against the yen at 110.02 yen after reaching a four-month high of 110.49 yen.
The dollar gained 0.25 percent to 1.2980 Swiss francs after hitting a three-month high of 1.3075 francs. Sterling was down about 0.57 percent at $1.8296 . The U.S. dollar was up about 0.37 percent against the Canadian dollar at C$1.3467 after notching a five-month high of C$1.3586.
Traders said much of the dollar buying that had pushed the euro down nearly 2 percent on Tuesday was technically driven in a market which has been selling the dollar for months.
"Today we are seeing the carry-on from the trend we saw yesterday," said Mitul Kotecha, head of global foreign exchange research at Credit Agricole Indosuez.
"The break of support for the euro at $1.2350 was a big level and that accelerated the move and technically the euro looks vulnerable here to a test down to $1.20."
RATE OUTLOOK SHIFTING
An expected improvement in the U.S. jobs sector has fueled speculation in the market that the Federal Reserve (news - web sites) may soon be in a position to raise interest rates earlier than had been expected. This would make yields on U.S. assets more attractive to investors.
The euro's decline has led interest rate futures markets to price out the risk of a cut in euro zone borrowing costs in coming months, after talk the European Central Bank might lower rates at its meeting on Thursday hit the single European currency in the past week.
The Reuters Eurozone Business Activity Index for the service sector slipped to 56.2, below a forecast of 57.1, from 57.3 in January. Euro strength helped slow the growth but a pick-up in consumer demand kept it above the 50 level separating contraction from expansion for the eighth consecutive month. (Additional reporting by Daniel Bases in New York and Burton Frierson in London)
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