Dollar drops, euro rallies as U.S. jobs data buoys risk-taking

NEW YORK Fri Aug 3, 2012 2:51pm EDT

Euro notes are pictured at a bank in this photo illustration taken in Seoul June 18, 2012. REUTERS/Lee Jae-Won

Euro notes are pictured at a bank in this photo illustration taken in Seoul June 18, 2012.

Credit: Reuters/Lee Jae-Won

NEW YORK (Reuters) - The dollar sank on Friday as better-than-expected U.S. jobs growth in July had investors selling the traditional safe-haven currency while embracing the euro, putting it on track for its best one-day rise in a month.

The single currency had been rallying before the jobs data as investors took a more optimistic view of Thursday's European Central Bank meeting in which the bank signaled further support for debt-stricken Spain and Italy.

U.S. employers in July hired the most workers in five months, but an increase in the jobless rate to 8.3 percent kept prospects of further monetary stimulus from the Federal Reserve on the table, a negative for the dollar.

The Fed this week sent a strong signal that a new round of major support could be on the way if the recovery did not pick up.

Investors bought the euro, which tumbled during the previous session, as the focus shifted from the lack of immediate ECB policy action to the fact that a path has been laid out that would allow for a much more forceful ECB move.

"The euro and most foreign currencies are higher as markets reversed some of the initial disappointment following yesterday's ECB announcement," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.

"Overall, this week's trifecta of key market events has produced more good than bad."

The euro rose as high as $1.2392 on Reuters data and was last up 1.6 percent at $1.2370, on track for its best day since the end of June.

Risk-taking also buoyed the euro against the yen. The single currency rallied 2.1 percent to 97.24 yen.

Spanish Prime Minister Mariano Rajoy inched closer on Friday to asking for an EU bailout for his country, but said he needed first to know what conditions would be attached and what form the rescue would take.

"While the path for foreign exchange markets going forward will undoubtedly remain uneven, we view this week's events as consistent with U.S. dollar and yen weakness, and strength in other G10 and emerging currencies in the coming weeks and months," Bennenbroek said.

Recent highs for the euro around $1.2390/1.2406 were expected to be strong resistance for the euro with speculators and long-term investors, such as reserve managers looking to sell the euro on any bounce, traders said.

The ECB said on Thursday it will draw up plans in the coming weeks to make outright purchases to stabilize euro zone borrowing costs, disappointing hopes for quick action to address the debt crisis.

It indicated any intervention would not come before September, and bank President Mario Draghi also said intervention would come only if governments activated the euro zone's bail-out funds to join the ECB in buying bonds.

"Compared to expectations two weeks ago, the ECB has delivered something more," Jens Nordvig, global head of currency strategy at Nomura Securities in New York, wrote to clients.

"This does not mean that the euro crisis is over, but it does improve the risk distribution for certain euro zone assets and global risk assets more generally."

The dollar gained 0.5 percent against the yen, to 78.60 yen, after hitting a two-week high of 78.77, according to Reuters data.

(Additional reporting by Wanfeng Zhou, editing by Dave Zimmerman)

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Comments (1)
dareconomics wrote:
Occasionally, we observe dramatic market moves in response to an event. A recent example would be Draghi famed “believe me, it will be enough” comments last week. Recall that right after these comments Italian and Spanish yields dropped, world stock markets rallied and the Euro rose nearly two cents.

Event-driven moves are the exception rather than the rule. Virtually all of the movement we see on any given day is random noise. Today, the euro, Spanish & Italian debt, and European markets rallied. This article is attributing these rallies to new optimism that the ECB is going to do something notwithstanding the fact that they announced yesterday that they are not.

The real reason these markets rallied is…

I don’t know. No one knows. People like to believe that the world is a logical place, and these markets are moving up or down for a reason, but this is a false assumption. S0-called professionals are loathe to admit that they have no idea why something just happened; hence, if a reported asks one for an explanation of market moves, the expert will repeat a rumor rather than admit that he does not know why the market rallied/tanked.

http://dareconomics.wordpress.com/

Aug 03, 2012 10:04am EDT  --  Report as abuse
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