Dollar spikes versus yen, triggering BOJ intervention rumors
By William L. Watts, V. Phani Kumar and Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — The U.S. dollar pared losses against the euro and other major currencies in a volatile session on Friday after much weaker-than-expected U.S. nonfarm payrolls data raised the chance that the Federal Reserve will take action.
The dollar had been up before the data after a round of lackluster manufacturing surveys from China and the euro zone, but was somewhat offset by an improvement in European government bond markets.
Also grabbing currency traders’ attention, a sharp spike higher by the dollar versus the Japanese yen prompted rumors of intervention by the Bank of Japan, strategists noted.
The dollar index DXY -0.02% , which measures the greenback’s moves against a basket of six major currencies, turned down to 82.983 from 83.035 late Thursday. It rose as high as 83.542 just after the jobs report, which sent traders scurrying away from riskier assets.
The euro EURUSD +0.22% briefly topped $1.24, then lately bought $1.2390 versus $1.2369 in North American trade late on Thursday. The shared currency initially skidded as low as $1.2292 in the wake of the U.S. payrolls figures, according to FactSet Research data.
The U.S. Labor Department said 69,000 jobs were created during May, the smallest increase in a year and well short of economists’ forecasts. The unemployment rate rose to 8.2% from April’s 8.1%. See story on jobs report.
The upside for the dollar was limited by concerns that the weakness of the U.S. recovery could persuade the Fed to undertake further monetary easing, which usually devalues a currency.
“The takeaway from a report this bad is that it significantly increases the prospect of the Fed easing at the next meeting,” said Ron Leven, senior currency strategist at Morgan Stanley
He expects the Fed to expand its balance sheet by purchase more bonds, not just continuing its current program of buying longer-dated Treasurys and selling shorter-term holdings. Read about Fed member’s outlook.
“Quantitative easing makes the system flush with liquidity, making it easier for people to get funding, and generally what we’ve seen from the last rounds of QE is that it underpins equities and asset valuations,” Leven said.
On Friday, stocks took the economic data badly, with the S&P 500 Index SPX -1.92% dropping 1.7%. See story on U.S. stocks.
Treasury prices jumped, pushing yields to record lows — benefitting from higher QE expectations or a rush to the relative safety compared to stocks. Read about Treasury rally.
The safe-haven flows into U.S. Treasurys and core bonds is a concern, said Douglas Borthwick, managing director of Faros Trading.
“More and more people are crowding into a shrinking asset space, where the economies (U.S. and Germany) are not faring as well as most had hoped. As the [dollar] is reaching peaks for the year, further QE could see this position under extreme stress,” he said.
