Dollar Rises as May Jobs Increase Show Economy Strengthening

The dollar gained against the euro after a report showed U.S. employers added jobs last month, adding to signs the world’s largest economy is strengthening and boosting Treasury yields.

The U.S. currency rallied as payrolls matched forecasts and the unemployment rate held at the lowest since 2008, backing speculation the Federal Reserve will hold interest rates at record lows as it curtails bond purchases. The euro slipped against most major peers after the European Central Bank’s announced a package of stimulus measures yesterday. Mexico’s peso slid after the nation’s central bank unexpectedly cut interest rates. South Africa’s rand and Brazil’s real gained against the greenback and the common currency.

“Euro-dollar mostly followed U.S. yields,” Daniel Katzive, a director and head of foreign-exchange strategy, North America, in New York at BNP Paribas SA, said in a phone interview. “Yields moved lower after the report, probably reflecting positioning, but they’ve subsequently pushed higher for the day and that’s supporting the dollar versus the lower-yielding currencies.”

The dollar added 0.1 to $1.3643 per euro at 5 p.m. in New York, after touching the highest level since Feb. 6 yesterday. The U.S. currency gained 0.1 percent to 102.48 yen. Japan’s currency strengthened 0.1 percent to 139.80 per euro.

Treasury two-year notes yields rose two basis points, or 0.02 percentage point, to 0.40 percent, after dropping one basis point.

Volatility Drops

JPMorgan Chase & Co.’s volatility index for the currencies of the Group of Seven nations fell to record low, sliding to 5.60 percentage points.

Hedge-fund managers and other large speculators added to bets the euro will weaken against the dollar to the most since July. The difference in the number of wagers on a decline in the common currency, compared with those on a rise -- so-called net shorts -- was 33,025 on June 3, compared with 16,633 a week earlier, according to data from the Commodity Futures Trading Commission.

The Mexican peso slipped as much as 0.5 percent against the dollar after the country’s central bank reduced its key interest rate to 3 percent. The monetary authority last month lowered its growth forecast for this year to between 2.3 percent and 3.3 percent from a previous estimate of 3 percent to 4 percent.

South Africa’s rand added 1.1 percent against the common currency to 14.4436 and 0.9 percent versus the greenback to 10.5875. The rand outperformed all of its 16 major peers.

Brazil’s real gained 0.7 percent to 2.2473 per dollar.

ECB Policy

The euro gained the most in three months versus the dollar yesterday after the ECB became the first major central bank to charge fees on deposits and unveiled other plans to support an economy threatened by deflation. ECB Governing Council member Ewald Nowotny said inflation was “massively” below the central bank’s target.

“The ECB measures could boost risk appetite and demand for carry,” said Valentin Marinov, head of European Group of 10 currency strategy at Citigroup Inc. in London. “Negative deposit rates will force banks to spend their excess cash. Presumably part of that will go into risk-correlated, higher yielding assets like stocks or high-yielding currencies.”

The U.S. jobs report added to signs the economic recovery is picking up after gross domestic product shrank in the first quarter an annualized 1 percent amid harsh winter weather.

Jobs Report

Nonfarm payrolls increased by 217,000 in May, versus 282,000 in April and a gain of 215,000 projected by economists in a Bloomberg survey. The unemployment rate held at 6.3 percent. The increase in payrolls put total employment beyond its peak of 138.4 million reached in January 2008, one month after the start of the deepest recession since World War II.

“Because we’re right in line with the consensus, it doesn’t really give you much in terms of how the Fed’s view point will change,” said Brian Daingerfield, currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut. “We’re due for a pretty muted close-out to the week after a number that came basically in line with where the economists and where the trend has been in terms of U.S. job growth.”

The Fed, which meets June 17-18 to review policy, is slowing the pace of the bond purchases it uses to hold down long-term borrowing costs and fuel growth. It has kept the benchmark interest-rate in a range of zero to 0.25 percent since 2008 and hasn’t raised rates since 2006.

Fed Chair Janet Yellen testified to lawmakers May 7 that the central bank will probably end bond-buying in the fall if the labor market continues to improve. Still, she said “a high degree of monetary accommodation remains warranted” with employment and inflation far from the central bank’s goals.

Fed Watch

“Today’s data I don’t think will change that bias from the Fed at all,” said Robert Lynch, a currency strategist at HSBC Holdings Plc in New York. “The market seems to side with the message the doves are presenting which is that policy is going to remain accommodative for a long long time. Those conditions are less helpful for the dollar.”

The Canadian dollar fell to almost a one-month low after the nation’s unemployment rate unexpectedly rose last month.

“You get the sense the Canadian economy is just fighting for momentum,” said David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, by phone from Toronto, before the report. “You get open to the idea, despite inflation being at 2 percent, maybe you have more credible discussion the next move by the bank could be a cut.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell as much as 0.2 against the U.S dollar.

To contact the reporter on this story: Rachel Evans in Hong Kong at revans43@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Paul Cox

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