Dollar falls drastically against the Euro as U.S unemployment soars

Weekly Analysis

Tue, Jun 10 2008, 05:58 GMT
by Benny Menashe

BBVA Bancomer

The dollar fell the most against the euro in two months as the U.S. unemployment rate posted its biggest increase in two decades and the European Central Bank signaled it may raise interest rates in July which are currently at 4%. The U.S. jobless rate increased to 5.5 percent last month from 5 percent in April, the biggest jump since February 1986 over 20 years ago, the Labor Department reported yesterday. The forecast was for an increase to 5.1 percent. U.S. payrolls have shrunk every month this year, dropping 49,000 in May,in turn the ECB President Jean Claude Trichet said policy makers are in a state of ``heightened alertness'' over inflation. His remarks pushed the dollar down from a four-week high after Fed Chairman Ben Bernanke said the central bank is ``attentive'' to the implications of the weakened currency.

The dollar fell 1.4 percent to $1.5778 per euro this week, from $1.5554 on May 30. The dollar decreased 0.6 percent this week to 104.93 yen, from 105.52. The euro increased 0.9 percent to 165.54 yen, from 164.15 a week earlier. It touched 166.16 yesterday, the strongest level since Dec. 28.The dollar's decline against the euro was the biggest since the week ended, March 28. It touched a four-week high of $1.5365 on June the 5th, before Trichet's remarks that day, compared with the all-time low of $1.6019 reached April 22nd. ``The labor market is deteriorating,'' said David Powell, currency strategist in New York at Bank of America Corp. ``The interest-rate differential is moving in favor of the euro and against the dollar. We're going to retest $1.60.''

Sterling slipped against the euro on Friday, extending losses a day after the European Central Bank said an interest rate rise was possible next month, while Bank of England rates are expected to fall later in the year. Despite its losses against the euro, the pound jumped against the dollar, pulling away from a two-week low after a jump in the U.S. unemployment rate triggered a broad sell off in the U.S. currency. Analysts said that while sterling had received an initial boost from weakness in the dollar, continuing evidence of a struggling UK economy would continue to keep the pound on the back foot. "Sterling is very much in the high-risk camp, which means that it will continue to perform on any negative UK news," said Lena Komileva, G7 market economist at Tullett Prebon. "Dollar weakness is not a reason for optimism about the UK economy, as it's very clear that the UK economic cycle is tracking the U.S. one." Sterling rose 0.3 percent to $1.9648, recovering from an earlier slide to $1.9538 after the U.S. unemployment rate came in at 5.5 percent in May, jumping from 5 percent the previous month and stirring concerns that a grim jobs market may further weaken the economy.

Crude oil increased to a record high of $139.12 a barrel yesterday as demand grew for a hedge against a weakened dollar. The U.S. currency has lost 11 percent against the euro since the Fed started to lower interest rates from 5.25 percent in mid- September, pushing the price of oil, gold and corn higher