Dollar Falls This Week as Fed Rate Increase Expectations Ease

(Bloomberg) -- The dollar fell against the euro and yen, snapping a two-week rally, as signs of slowing growth reduced expectations the Federal Reserve will lift interest rates later this month.
Traders pared bets the central bank will increase borrowing costs by a quarter-percentage point for a 17th straight time after reports showed the economy added the fewest jobs since October and manufacturing slowed.
``There's the sense that maybe the Fed is not going to be going as much as people had been expecting,'' said Jeffrey Young, head of currency research in New York at Citigroup Inc. ``This will be marginally negative for the dollar.''
The U.S. currency weakened 1.4 percent this week to $1.2918 per euro at 5:25 p.m. in New York yesterday. It fell 0.8 percent on the week to 111.71 yen.
U.S. employers added 75,000 jobs last month, fewer than any economist forecast, a Labor Department report showed yesterday. The median forecast of 80 economists surveyed by Bloomberg was for the economy to generate 170,000 jobs. The unemployment rate fell to 4.6 percent from 4.7 percent.
``We're questioning how much growth we will have going forward,'' said David Durrant, an investment strategist in New York at Julius Baer Investment Management, which oversees about $40 billion. ``We're dollar bears.''
Lower Odds
Interest-rate futures showed traders see a 48 percent chance the Fed will lift its benchmark a quarter-point to 5.25 percent on June 29, the lowest since May 16 and down from 68 percent odds before the release of the labor report.
``This places significant downward pressure on the dollar going forward,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``There were few redeeming factors'' in the jobs report, he said.
Ruskin is considering lifting his year-end forecast for $1.30 per euro.
The dollar reached a one-month high against the yen this week after the Fed's May 10 minutes suggested the central bank may still raise rates this month.
``Recent developments suggested that upside risks to inflation had risen somewhat since the time of the March meeting,'' the Federal Open Market Committee said in records of the May 10 session, released on May 31.
`Excuse to Pause'
``The Fed takes away from this that they have an excuse to pause if they want to,'' Lara Rhame, a currency strategist at Credit Suisse Group in New York, said of the labor report. ``The knee-jerk reaction: it's a dollar negative.''
She forecasts a dollar decline to 110 yen in three months.
U.S. factory orders fell 1.8 percent in April, a government report showed this week. Manufacturing growth slowed last month, a private industry report showed June 1. The same report showed manufacturers paid more for their purchases for a third straight month in May, adding to the case for further rate increases to stem inflation.
``The crucial expectation is that growth is to slow in the second half of the year,'' said Kamal Sharma, a currency strategist at Bank of America Corp. in London. ``It weighed on the dollar across the board.''
The dollar may fall to $1.33 per euro and 105 yen within six months, he said.
Paulson Nomination
The dollar dropped 0.9 percent against the euro on May 30, the most in six weeks, on speculation Treasury secretary nominee Henry Paulson won't try to stop a slide in the currency.
The U.S. currency has fallen about 4.5 percent against the euro and yen since April 21, when the Group of Seven industrialized nations urged China and other developing Asian nations to let their currencies strengthen. The yuan is little changed since then as China limited its currency's advance.
The dollar has lost about a quarter of its value against the euro since Bush took office in January 2001, even as the administration has said it supports a ``strong dollar.''
Paulson, Goldman Sachs Group Inc.'s chief executive officer, will replace John Snow, who took the post in February 2003. The appointment is subject to Senate confirmation.
``I don't think the nomination of Paulson has changed anything,'' said Meg Browne, a currency strategist in New York at Brown Brothers Harriman & Co. ``It's not as though he has a differing view from the current administration's policy.''

To contact the reporter on this story:
Deborah Finestone in New York at
dfinestone@bloomberg.net;
Michael McDonald in New York at mmcdonald10@bloomberg.net