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18 January 2014, 08:50

Dollar slides over weak labour market report

The highlight of the week was U.S. dollar’s fall against most major currencies, after data on much lower than anticipated job numbers, raising serious doubts about the pace of recovery in the world’s largest economy. Data from the Bureau of Labour Statistics indicated that job growth slowed dramatically in December 2013, thus questioning the Federal Reserve’s decision to cut its bond-buying programme. The weak job growth triggered a slide in U.S. treasuries and strengthened the case for the Fed to keep interest rates low for a longer period of time.

The much-anticipated non-farm payroll reportshowed that only 74,000 jobs were created in December, well below expectations for the creation of 194,000 new jobs and much below the upwardly revised November figure of 241,000. It is noteworthy that this number marks the lowest employment monthly upsurge within the last three years. In addition, the Ministry of Labour reported an increase in the number of applications for unemployment benefits from 15,000 to 330,000 in the first week of January 2014. The report also indicated that the unemployment rate dropped from 7% in November to 6.7%, although this decline was due to weak participation rate caused by arctic weather conditions prevailing in December.

TeleTrade analysts said “Forex traders had been awaiting a strong dollar in anticipation of a positive US jobs figure, after the healthy employment preliminary report released from ADP”. The negative figures came as a shock to the financial market consensus, expecting an increase of 194,000 in the number of people employed in December. Economists also estimated the unemployment rate to remain unchanged at around 7%.

U.S. dollar weak against most rivals

In the wake of disappointing U.S. job numbers on January 10th, 2014, most currencies gained ground on the greenback, with the euro gaining 0.5% to $1.3686 rising to more than one week high, while the yen climbed 0.7% to Y104.05, touching the strongest in three weeks. Australian dollar touched a one-month high of up to $0.9038against the U.S. dollar, after home-loan approvals exceeded expectations and climbed 1.1% from the previous month.

Before the release of the non-farm payroll report, the dollar had started to strengthen, along with the Fed’s announcement on December, 18, that it would begin its tapering of stimulus with a $10 bn-a-month reduction in its $85bn monthly purchase of bonds. At the time of the announcement of the report, the U.S. dollar index, which tracks the performance of the currency versus a basket of six other major currencies, fell 0.5% from 81.01 to 80.59.

In much interest of traders, emerging market currencies will beamong the biggest beneficiaries of the possible maintenance of the current pace of tapering, having previously been under pressure, as investors took funds away from themto the recovering developed economies. After the release of the data, the South African Rand gained 0.6% against the dollar, the Brazilian Real a 1%, the Philippine Peso a 1.7% and the Indonesian Rupiah edged up more than 2%.

Earlier on Monday, January 13th, the greenback still traded low against major currencies, though it narrowed its losses, as traders avoided the currency after the employment report disappointed the markets and fuelled expectations for the Fed to take its time in scaling back stimulus.

In the week ahead, January 14 – 17, Forex traders will need to closely monitor U.S. data on retail sales, inflation and consumer spending, which account for the majority of the overall economic activity, as well as import prices, business inventories and speeches by two Federal Reserve’s officials. US retail sales may indicate sharp fall in consumer demand, and if so, it may delay even more the stimulus reduction process by the Fed.

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