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Dollar rises as US job growth reduces chance of Fed rate cut - extended

The dollar touched the highest in more than a week against the yen and advanced versus the euro after a government report showed stronger-than-forecast US job growth, reducing expectations for Federal Reserve rate cuts.

The US currency's gain started as a rise in emerging-market assets pushed investors to bet on a drop in the yen, which today is the world's worst-performing currency. Japan's lowest interest rate among major economies spurs the so-called carry trade in which traders borrow yen to buy higher-yielding assets. „The US economy is still growing at a decent pace,” said Mike Moran, senior currency strategist at Standard Chartered Bank in New York. „The dollar is benefiting from that.”

The dollar rose to 118.11 yen at 10:56 a.m. in New York, from 117.18 yesterday. It touched 118.33, the strongest since March 1. It also advanced to $1.3110 per euro from $1.3133. The US currency has gained 1.8% against the yen since yesterday, the biggest two-day advance since June 2005, as a rout in shares that started last week lost momentum, encouraging a return to the carry trade.

US employers hired 97,000 workers in February, after a revised gain of 146,000 in January, the Labor Department said in Washington. That compared with a median forecast of 95,000 in a Bloomberg survey. Revisions for the previous two months showed employers added 55,000 more jobs than the Labor Department had earlier estimated.

The unemployment rate was 4.5% in February, compared with 4.6% a month earlier, according to the report. A Bloomberg survey called for the rate to be unchanged. The odds the Fed will cut borrowing costs in August fell to 79% after the payroll report was released, from 100% yesterday, according to interest-rate futures. „Traders have to take off their bets on Fed rate cuts,” said Jeff Gladstein, global head of foreign-exchange trading at AIG Financial Products in Wilton, Connecticut. „The short-dollar positions are under some water.” A short position is a bet on a currency's drop. The yen dropped for a second day against the dollar and euro as a rally in global stocks and emerging-market assets as well as the payroll data encouraged investors to put on carry trades.

The yen fell 0.6% to 154.83 per euro from 153.89 yesterday. It also dropped 1.3% versus the New Zealand dollar, 1.3% against the Canadian dollar and 1.1% versus Australia's currency. The Swiss franc, another funding currency for the carry trade, dropped against all most-active currencies except the yen.

„The payroll report is the first green light to put back on carry trade,” said Paresh Upadhyaya, who helps manage $29 billion in currency assets at Putnam Investments in Boston. „Risk appetite is coming back.” The Bank of Japan's interest rate, at 0.5%, is the lowest among industrialized nations, which has encouraged investors to put on carry trades. The yen fell to a record low of 159.65 per euro on February 23, and 122.19 per dollar on January 29, the weakest in four years. The Reserve Bank of New Zealand lifted borrowing costs to a record 7.5% yesterday and the European Central Bank raised its benchmark interest rate to 3.75%. The Bank of England kept its rate at 5.25% yesterday, matching the US benchmark. The Reserve Bank of Australia held its borrowing costs at 6.25% on March 7. Switzerland's rate is 2%.

The yield advantage of US Treasury 10-year notes over similar-maturity Japanese government debt widened to 2.96 percentage points, from 2.89 percentage points yesterday. A widening gap boosts the allure of dollar-denominated assets relative to those in Japan. „The market now is more comfortable with carry trades as the BOJ will be on hold at least until July, and the Fed rates remain high,” said Tim Mazanec, senior currency strategist at Investors Bank & Trust Co. in Boston. „It's still a story of interest-rate differentials.” The US economy may expand at a 2.4% annual rate this quarter, and accelerate to 3% by year-end, according to the median estimate of 75 economists surveyed by Bloomberg News from March 1 to March 7. The economy grew at a 2.2% pace in the last three months of 2006. A separate report showed the US trade deficit narrowed in January as imports fell and expanding economies in Europe and Asia boosted demand for American goods. The gap between imports and exports shrank to $59.1 billion in January, from a revised $61.5 billion the month before, the Commerce Department said in Washington. (Bloomberg)