Interest-rate differentials expected to call tune, analysts say
LONDON (MarketWatch) — The dollar recovered from an early bout of weakness to push modestly higher Monday, extending gains scored at the end of last week in the wake of a mixed U.S. jobs report.
The dollar index (DXY 78.19, +0.15, +0.19%) , a measure of the U.S. unit against a basket of six currencies, rose to 78.188 from 78.023 late Friday.
The euro (EURUSD 1.3536, -0.0026, -0.1917%) slipped to $1.3548 from $1.3590 in late North American trading on Friday.
Currency analysts said rising U.S. Treasury yields would also keep the European unit in check: The yield on the 30-year bond rose to its highest level in more than nine months Friday. Read Friday's Bond report.
“The euro will look increasingly vulnerable to a further drop this week especially given the increase in net positioning over the past week” to Feb. 1, said Mitul Kotecha, head of global foreign-exchange strategy at Credit Agricole.
“The potential for position squaring looms large as positioning is now well above the three-month average. Stops are seen just below $1.3540,” Kotecha said in a note to clients Monday.
While Friday’s U.S. nonfarm payrolls rose only 36,000, investors appeared to look past the disappointing figure, which was tied in part to bad weather. Instead, the focus was on the sharper-than-expected drop in the unemployment rate, down to 9%, analysts said.
Nevertheless, the employment picture in the largest global economy looks unlikely to improve to levels that will allow the Federal Reserve to begin lifting U.S. interest rates any time soon, while the European Central Bank appears likely to begin tightening by late this year, said Jane Foley, senior currency strategist at Rabobank.
Although German two-year paper lost some of its yield advantage over U.S. notes last week, yields are likely to remain biased in favor of the euro over the dollar in coming months, she said, while cautioning that the single currency’s projected advance on the dollar is unlikely to be smooth.
The euro slipped versus the dollar after Germany’s economics ministry said factory orders fell by a larger-than-expected 3.4% in December, a reversal following November’s 5.2% increase. Orders had been forecast to fall 1.5%.
Also, a Friday summit of European leaders saw Germany’s proposal for a “competitiveness pact” in return for underwriting more firepower for the euro-zone rescue fund met opposition from a number of smaller countries, clouding the outlook for an increase in the effective size of the European Financial Stability Facility. See "EU summit divisions reignite euro jitters."
Meanwhile, the British pound (GBPUSD 1.6128, +0.0030, +0.1864%) edged up to $1.6111 from $1.6105 late Friday.
Thursday’s Bank of England meeting “obviously casts a shadow over the market,” wrote strategists at Lloyds Bank.
While most economists expect the central bank to stand put on policy, the money market sees a one-in-five chance of a rate hike, which will likely convince some investors to hold their long positions in hopes of catching the market cold, they said.
