Rekindled credit fears hit dollar

FE Team | Published: October 07, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

Neil Dennis, FT Syndication Service
LONDON: The dollar fell on Friday as fears about credit market casualties were rekindled after a profit warning from Merrill Lynch.
Having spiked 0.7 per cent following stronger than expected US jobs growth data, the US currency erased the day's gains after Merrill said a $4.5bn write-down related to structured and subprime-backed debt would cause third-quarter losses.
The euro and sterling had also gained last Thursday after decisions by the European Central Bank and the Bank of England to keep their base rates on hold, but otherwise the week belonged to the previously beleaguered US currency.
Few investors had wanted to extend trading positions on the dollar ahead of Friday's September non-farm payrolls data, the closely-watched but volatile gauge of job creation in the world's largest economy. But the currency edged cautiously higher on Monday through to Thursday's European rate decisions, leaving the dollar higher over the week.
August's payrolls data had registered a shock decline. Another fall would surely spell economic downturn, analysts said, while an unexpectedly strong number would confirm there was still life in the economy.
The latter proved to be the case, with 110,000 jobs created. Furthermore, August's fall of 4,000 was revised to show a gain of 89,000.
"The strength of September's payroll employment figures and the upward revisions to recent months make it less likely that the Fed will feel the need to cut interest rates again at its next meeting," said Paul Asshworth, at Capital Economics
Michael Woolfolk, at Bank of New York, said: "This is a big boost for the economy, and the Federal Reserve gets a big pat on the back for acting in a timely fashion to the August financial turmoil."
Over the week the dollar gained 1.0 per cent against the euro to $1.4135, and was up 0.2 per cent to $2.0412 against sterling.
The US payrolls data provided another sell signal for the Japanese yen, as hopes were revived that the worst of financial market volatility was over.
Volatility is dangerous for the carry trade, where gains on interest rate differentials can be instantly wiped out by wild price swings. But calmer conditions encouraged selling of the yen to provide funds for purchasing higher yielding assets.
"The combined effect of the Fed's rate cut alongside the apparent easing of the stresses in the credit and funding markets have seen risk appetite return," said Robert Lynch at HSBC.
The euro climbed 0.8 per cent over the week to Y165.18, while the dollar added 1.6 per cent to Y116.70.
But the highest yielding currencies soared. While Japanese interest rates languish at 0.5 per cent, Australian rates looked as though they might soon be extended beyond their current 6.5 per cent after surprisingly strong retail sales numbers last Wednesday.
The Aussie dollar rose 2.6 per cent to Y104.82 over the week. New Zealand's dollar rose 1.6 per cent to Y88.66.
Calls for action to prevent excessive growth in the euro continued, with Romano Prodi, Italian prime minister, saying he had spoken with Angela Merkel, German chancellor, and both had expressed concerns over the currency's strength.
Jean-Claude Trichet, ECB president, was not explicitly critical of the euro's strength after the bank's policy meeting last Thursday, but said "disorderly developments" in currency markets were a threat to growth.
Over the week the euro was down 0.6 per cent against sterling to Â£0.6930.
Another FT Syndication Service report by Eoin Callan and Krishna Guha in Washington and Michael Mackenzie in New York adds: Worries about a severe downturn in the US economy receded on Friday as better-than-expected employment data sent Wall Street stocks into record territory and London and European equities to their highest levels since the credit squeeze.
The September jobs report also eased the pressure on the Federal Reserve to cut interest rates to counter the economic effect of the credit squeeze and problems in the US housing industry.
Data showed that the US economy created 110,000 jobs last month and employers added 89,000 staff in August.
This was a sharp revision from earlier estimates, which had suggested 4,000 jobs were lost in August. That had shocked markets and was one of the factors that spurred the Fed into cutting its benchmark interest rate by 50 basis points.
The labour department said first estimates had badly understated government payrolls, particularly teachers returning to school after summer. There was also a September improvement in recruitment in the services sector. Unemployment inched up to 4.7 per cent in September.
President George W. Bush said the monthly jobs report showed a "vibrant economy".
Don Kohn, Fed vice-chairman, said the economy was likely to rebound after a period of weakness caused by the housing market. "Once we get through the near-term weakness...I am looking for moderate growth," he said.
Stocks rallied. The FTSE 100 rose almost 50 points to an 11-week peak of 6,595.8, less than 140 points off its record close for the year.