Currencies

Thursday July 31, 06:50 AM
FOREX-Dollar holds near one-month highs, U.S. jobs eyed

TOKYO, July 31 (Reuters) - The dollar held near one-month highs against the euro and yen on Thursday after a boost the previous day from unexpected employment gains that raised hopes the U.S. economy may not deteriorate further.

The

dollar's gains were kept in check as oil prices snapped a losing streak, which has bolstered the U.S. currency on hopes that the 10 percent slide in crude prices this month would take some of the pressure off the struggling economy. [O/R]

Many investors stuck to the sidelines before a slew of U.S. economic data over the next few days, including a monthly payrolls report on Friday, which will test expectations the Federal Reserve may lift interest rates later in the year.

The dollar's fortunes have started to turn up as the euro zone, Japan, Australia and many other economies show clear signs of losing steam nearly a year after the credit crunch first erupted. Australian retail sales suffered their biggest drop in six years in June. [ID:nSYD4423]

'The dollar is the winner in what's becoming an ugly contest,' said Masafumi Yamamoto, head of forex strategy for Japan at Royal Bank of Scotland (LSE: 91ID.L - news) .

'I'm not bullish on the dollar, the market still expects too much tightening by year-end. But it may gain and will not fall substantially.'

The dollar dipped 0.1 percent from late U.S. trade to 107.97 yen <JPY=>, holding near a one-month peak of 108.34 yen struck the previous day.

The single European currency slipped 0.1 percent to 168.23 yen <EURJPY=R> but was near a record peak just below 170 yen.

The euro <EUR=> was flat at $1.5580 after dropping as far as $1.5522 on trading platform EBS on Wednesday, a one-month low.

The ADP employment report, a private sector gauge of labour market trends, showed a surprising 9,000 increase in jobs in July, much better than an expected 60,000 drop. [ID:nN30438138]

But analysts warned that the ADP (Paris: FR0010340141 - news) figures have a spotty record in predicting how the outcome of the government jobs report, which has showed companies cutting workers every month this year.

'The correlation between employment reports from the ADP and the U.S. government has not been that strong lately,' Shuichi Kanehira, a senior forex trader at Mizuho Corporate Bank.

'Investors should not be so bullish about the dollar until they see the Labor Department's jobs data, as well as today's GDP data.'

The payrolls report is viewed as key because Fed officials have indicated their discomfort with a pick-up in inflation pressures, but persistent job losses make it difficult for the Fed to consider lifting rates from 2 percent.

Thursday's reports will feature the U.S. economy's overall performance for the second quarter, as well as the Chicago PMI reading on Midwest business activity.

The expansion of emergency lending facilities by the Fed, ECB and Swiss National Bank also briefly helped the dollar, showing that top central banks were seeking to keep money flowing through strained money markets and prevent a renewed downturn.

YEN AND AUSSIE STRUGGLE

The yen has been hurt by expectations the Bank of Japan will keep rates on hold at 0.5 percent for several months as the economy has stalled, and as Japanese investors have shifted funds abroad to get better returns.

Japanese investors were buyers of foreign bonds for four of the past five weeks, with purchases over that period totalling 1.08 trillion yen ($10 billion), data from the Ministry of Finance showed on Thursday. [JP/CAP]

The pick-up in foreign bond buying comes as traders in Tokyo have cited persistent Japanese mutual fund buying of foreign currencies in the past few weeks. Fourteen new mutual funds were launched on Thursday, with some targetting foreign assets

The Australian dollar <AUD=> was little changed at $0.9440 <AUD=D4>, shaking off a brief dip after the retail sales report stoked expectations that the central bank could start cutting interest rates, with two quarter-point hikes priced in over the next year.

But while the high-yielding Aussie and New Zealand dollar have retreated against the dollar, their drop against the yen has been limited because Japanese investors and currency traders have been keen to buy.

Currency traders on the Tokyo Financial Exchange, who make leveraged bets with borrowed funds, have boosted their bets in favour of the kiwi and Aussie to a record high. (Additional reporting by Rika Otsuka; Editing by Rodney Joyce)

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