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Jobless news sees US dollar take tumble

DISAPPOINTING news about the United States economy sparked a dollar sell-off last week, which saw the currency marked sharply lower against the deutschemark, yen and sterling.

The currency started to drift downwards early in the week after the release of the consumer confidence index which dropped six points in last month.

Jobless claims which unexpectedly jumped by 33,000 for the last week of March, send the unit tumbling to a new record low against the yen and six week low of less than 1.60 Deutschemarks on Thursday.

On Friday the tone was bearish as the market anxiously awaited the release of the key employment report for the full month.

Although the unemployment rate remained unchanged at seven per cent, a fall in non-farm payrolls was enough to convince traders that the US economy was losing momentum.

Will the recent dollar sell-off continue? in the short-term it looks likely. Dollar bulls are beginning to run out of patience again, echoes of spring 1992 when the market turned against the currency and switched into the higher yielding European currencies.

But global economics have changed since then.

Europe is in bad shape, its economies hamstrung by Bundesbank persistence on monetary policy.

Although the German discount rate was cut by 50 basis points to 7.5 per cent on March 19, further reductions are essential to fortify not only the ailing German economy but the moribund economies of Continental Europe.

While stubborn Bundesbank officials are unlikely to throw caution to the wind, recent statements suggest that further reductions are definitely on the cards.

On the other hand, the chances of the Federal Reserve Board cutting rates in the US look remote. Recent disappointing statistics on the US economy only confirm that the pace of growth is slow, not that the recovery has stalled.

Nevertheless, the market may choose to ignore these facts in the near-term because interest rate differentials between the US and Germany are not narrowing as quickly as dollar investors desire.

Yen appreciation has an entirely different source. Since the beginning of February, the yen has been the subject of political jaw-boning and market speculation which has driven the currency to new highs against many currencies.

Over the next week, the dollar could face further downward pressure against the both the European currencies and the Japanese unit.

Although the dollar could pick up after the Easter break, it appears to have lost some of its earlier vigour. Caution should be the key for now as trading volumes fall further ahead of the holiday.

Pauline Gately is Head of Research at BNP International Financial Services