The dollar dropped against its rivals except the Canadian dollar Friday after the May US jobless rate posted its sharpest one-month increase in 22 years and employment fell for the fifth consecutive month. The surge in the unemployment rate is worrisome. The yen and Swiss franc rose on increased risk aversion as US stocks declined the most in 15 months and crude oil and gold rallied.
The EUR/USD had its largest weekly rally since the end of March on further signs of a deepening US economic contraction. The worsening US labor market situation is increasing both the euro's interest and growth advantage as the higher US recession risk is diminishing the chances of any Federal Reserve interestrate hikes. The EUR/USD's failure to break the 1.54 support and the possibility for a European Central Bank rate hike in July also contributed to this week's gain. The EUR/USD is in a well-defined uptrend; however, having been in a sideways pattern since March on optimism the US economy would stabilize and the Fed would reverse its super-easy monetary policy stance. Resistances exist in the 1.58-area and at the 1.6018 alltime high. A penetration of these resistances would be bullish for the EUR/USD, while a break of support would be bearish.
Financial and Economic News and Comments
US & Canada
US nonfarm payrolls fell a less-than-expected 49,000 in May, a fifth-straight drop, after April's revised larger drop 28,000 and March's revised larger drop 88,000, data from the Labor Department showed. Private (nongovernment) payrolls fell 66,000. The weakest sectors were temporary employment (down 30,000), retail (down 27,000), manufacturing (down 26,000), and home construction (down 25,000). The strongest sector was health care (up 42,000). The unemployment rate jumped more than forecast to 5.5% in May, its highest level since October 2004, from 5.0% in April. The half-point rise was the biggest since February 1986. The average workweek was unchanged at 33.7 hours. Average hourly earnings increased a slightly more-thanexpected 0.3% m/m, to $17.94, and rose 3.5% y/y. The overall figures show US consumers already facing a housing slump and rising oil and food prices confront more pressure from a weakening labor market; thus, reducing expectations of Federal Reserve interest-rates hikes.
US wholesale inventories rose 1.3% m/m, exceeding market expectations, to a seasonally adjusted $427.36 billion in April, following an upwardly revised 0.1% m/m increase in March (originally seen falling 0.1% m/m in March), data from the Commerce Department showed. Wholesale sales increased a more-than-expected 1.4% m/m in April to a seasonally adjusted $390.34 billion after a revised 1.8% m/m rise in March. The inventory-to-sales ratio fell to 1.09 in April from 1.10 in March. April wholesale sales rose 12.7% y/y, while wholesale inventories rose 8.1% y/y. The April numbers signal US wholesalers were somewhat successful managing inventories despite the difficulty posed by softening demand in the weak economy.
US consumer credit rose a more-than-expected $8.9 billion to $2.56 trillion in April, following a revised 13.1 billion increase in March, data from the Federal Reserve showed.
Crude oil rose more than $10 to a record as the dollar weakened after the US jobless rate surged the most in two decades and Morgan Stanley said prices may reach $150 within a month.
Federal Reserve Bank of St. Louis President James Bullard indicated that inflation should become the Fed's top priority as the US economy recovers in the second half and financial turmoil fades. “The U.S. economy will be able to post stronger growth in the second half of this year despite the ongoing financial crisis and the drag from the housing sector,” Bullard said in Madison, Wisconsin. “Such growth is likely to make the inflation outlook a more pressing concern for the Fed in the second half of this year,” he said.
Canada added 8,400 jobs in May, compared with 19,200 in April, Statistics Canada reported. May job growth was the slowest this year. The unemployment rate was unchanged at 6.1%.
Europe
Germany's industrial production unexpectedly declined 0.8% m/m in April, the Economy Ministry in Berlin said. The month-on-month fall suggests the German economy is cooling. April industrial production increased 4.8% y/y.
After the fastest economic expansion in 12 years in Q1 2008, Germany's economic growth is likely to be “more subdued” in Q2 and Q3 before picking up again at the yearend, Germany's Bundesbank said. The economy will grow 1.5% in 2009 after 2.5% in 2008, the bank said.
European Central Bank council member Axel Weber said financial markets, expecting an interest-rate increase in July, understood the ECB's message. The ECB “sent a clear signal to markets and to the broader public yesterday, which seems to have been well understood,” Weber said in London. The current “outlook on inflation is not acceptable for a stability-oriented monetary policy,” he said.
Asia-Pacific
The G-8 may try to convince China and India to agree to monitoring of cuts in energy use.
The yuan rose by the most in more than three months on speculation China will seek a stronger currency and a narrower trade surplus to help curb inflation.
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