Dollar and Yen Gain as Investors Liquidate Risky Assets

Source: CMS Forex

The dollar rose against most key currencies in volatile trading Friday despite the eight straight monthly job losses and unemployment rate at a 5-year high increasing risks of a worsening US economic slowdown. The dollar and yen were supported by sell-offs in asset and commodity markets as investors liquidated risky assets. The euro fell for a seventh consecutive day as Germany's industrial production declined more than expected. Sterling dropped a seventh week against the greenback. The Australian dollar fell as commodity prices continued their declines. The Canadian dollar rose on better-than-expected employment growth in Canada.

The USD/JPY touched a 7-week low on increased risk aversion as today's US employment report showed continuing weakness in the US labor market. The pair broke its 5-month uptrend but pared losses after oversold US stocks recovered earlier losses.

US nonfarm payrolls fell a more-than-forecast 84,000 in August, an eighth straight monthly drop, data from the Labor Department showed. Revisions to June and July subtracted 58,000 jobs, resulting in a net loss of 142,000. Private payrolls dropped 101,000 in August. The weakest job categories were manufacturing (down 61,000), temps (down 37,000), and retail (down 20,000). The strongest sector was education/health (up 55,000). The unemployment rate unexpectedly surged to 6.1% in August, the highest since 2003, following July's 5.7%. Average hourly earnings increased 0.4% m/m, to $18.14 in August, and rose 3.6% y/y, both higher than expected. The average workweek was flat at 33.7 hours. Today's grim employment figures, which included a modest increase in wages, suggest the Federal Reserve will hold its target for the federal funds rate steady at 2% at its September 16 meeting and at least through the end of the year.

The US economy is “stagnant,” Europe is heading to a recession, and central banks will not have much room to lower interest rates amid high inflation, the US Conference Board said. “This is a period of rolling adjustments, that goes from sector to sector, that will keep the U.S. growth rate low in the 1 percent-to-2 percent range for the foreseeable future,” said Gail D. Fosler, Conference Board president. “Europe is in somewhat more peril,” Fosler added. “The tech sector is beginning to weaken and the manufacturing sector, which has really held up, is likely to begin to weaken,” she said. “The U.S. is going to be in a relatively stagnant, relatively slow growth mode for the foreseeable future.”