Dollar Rises on Speculation June Jobs Gains to Bolster Outlook

The dollar rose from almost an eight-week low against a basket of peers as a stronger-than-forecast private jobs report boosted optimism that nonfarm payroll data tomorrow may show the U.S. economy is gaining traction.

The euro dropped to a 21-month low versus the pound after French Prime Minister Manuel Valls said the European Central Bank needs to go further to weaken the shared currency before policy makers meet in Frankfurt tomorrow. The greenback remained higher as Federal Reserve Chair Janet Yellen said there is no need to change monetary policy to address financial stability. Australia’s currency tumbled after the trade deficit widened more than economists forecast, while Brazil’s real fell the most in two weeks.

“For nonfarm payrolls, the ADP report obviously came in quite a bit stronger than expected, so expectation for tomorrow has risen,” said Brian Daingerfield, currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut. “I’m surprised the market reaction to Yellen’s speech is a bit muted. The Fed doesn’t see financial stability risk should derail them from their accommodative stance.”

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, added 0.3 percent to 1,005.15 at 5 p.m. in New York, after touching 1,002.25 yesterday, the lowest since May 8.

Market Prices

The euro declined 0.1 percent to $1.3660, after rising to $1.3700 yesterday, the strongest level since May 21. It gained 0.1 percent to 139.01 yen. The Japanese currency lost 0.2 percent to 101.77 per dollar.

China’s yuan fell by the most in two weeks after the central bank lowered the currency’s reference rate amid concern a property market slowdown will choke growth in the world’s second-largest economy.

The People’s Bank of China reduced its daily fixing by 0.04 percent to 6.1549 per dollar. New-home prices dropped in half of the 70 cities tracked by the government in May, the most since the same month of 2012, according to data June 18. The funding mechanism of local governments relies “too much” on land sales, PBOC Deputy Governor Pan Gongsheng wrote in the People’s Daily June 30. They need a regulated system to resolve debt risks and meet urbanization demand, he said.

The yuan dropped 0.15 percent, the most since June 16, to close at 6.2106 per dollar. The currency, which advanced 0.53 percent in the last four days, traded at a 0.9 percent discount to the daily fixing.

Aussie Drop

Australia’s dollar fell against most of its major peers after the statistics bureau reported the trade deficit expanded to A$1.9 billion in May, matching the largest since November 2012, and almost 10 times wider than the A$200 million shortfall predicted by economists in a Bloomberg survey.

Outbound shipments shrank 5 percent from the previous month. Prices of iron ore, Australia’s biggest export, fell 30 percent in the first two quarters, according to data from The Steel Index Ltd.

The Aussie dropped 0.6 percent to 94.43 U.S. cents after yesterday touching 95.05 cents, the strongest since Nov. 7.

“The declines that we’re seeing in some of our bulk commodity prices are feeding through into the trade numbers,” said Besa Deda, Sydney-based chief economist at St. George Bank Ltd. “It was a surprise outcome. The Australian dollar has come under downward pressure on the back of that.”

Pound Rally

The pound rose for a third day versus the euro after a report showed U.K. construction growth accelerated in June, adding to signs of strength in the economy. It also appreciated to the highest level against the dollar in five years.

Sterling appreciated 0.2 percent to 79.58 pence per euro after reaching 79.51 pence, its strongest level since October 2012.

ECB policy can’t just focus on interest rates and an overvalued euro is bad for industry and growth, French President Valls told Les Echos in an interview published today.

ECB President Mario Draghi faces pressure to act on the shared currency after it strengthened the most in three months against the dollar following the ECB’s June 5 meeting, when policy makers cut the refinancing rate and moved the deposit rate below zero for the first time. Draghi also said he will introduce targeted offerings of liquidity to banks to encourage them to lend, and that officials will start work on purchases of asset-backed securities.

Euro View

The market is “definitely covering a little bit of risk after this decent little rally,” Brad Bechtel, managing director at Faros Trading LLC in Stamford, Connecticut, said in a phone interview. “We’ve had a decent correction higher after a near touch of $1.35 that we never really traded, but we we’ve had a decent correction since then.”

All economists surveyed by Bloomberg forecast the ECB will keep rates unchanged tomorrow.

Brazil’s real led losses against the dollar among the major currencies after ADP Research Institute report today showed employment at companies climbed 281,000 in June, exceeding the most optimistic forecast in a Bloomberg survey. A government report tomorrow may also show nonfarm payrolls rose by 215,000 workers in June after climbing by 217,000 the prior month, according to another survey.

“The numbers from the U.S. job market came in much better than expected, which benefits the dollar,” Vladimir Caramaschi, the chief strategist at Credit Agricole Brasil SA in Sao Paulo, said in a telephone interview. “The real suffers from the impact of flows going back to the U.S.”

The real slumped 1 percent to 2.2236 per dollar, the biggest decline since June 17.

Traders are pricing in a 44 percent chance that the Fed raises borrowing costs from virtually zero by June 2015, down from 51 percent odds before Yellen reiterated on June 18 that rates would stay low for a “considerable time.”

“Monetary policy faces significant limitations as a tool to promote financial stability,” Yellen said today in prepared remarks at the International Monetary Fund in Washington. “Its effects on financial vulnerabilities, such as excessive leverage and maturity transformation, are not well understood and are less direct than a regulatory or supervisory approach.”

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