Rika Otsuka / Reuters
Tokyo: The dollar slid to a 15-year low against a basket of currencies on Monday, 10 September, after data showing US employers cut jobs for the first time in four years, stoking expectations for a hefty Federal Reserve rate cut this month.
Friday’s data showing companies cut 4,000 jobs last month, the first such decline since August 2003, leading investors to see a bigger chance the Fed will cut rates by 50 basis points next week to protect the economy from the housing market crisis.
Investors again sold the dollar on Monday after the unexpected drop in US jobs.
“The trend in the dollar is clearly downward,” said Tsutomu Soma, a senior manager of foreign securities at Okasan Securities.
The dollar’s trade-weighted index against six major currencies fell to a low of 79.826, the lowest since September 1992. It later pared its losses and traded at 79.927.
The dollar fell to as low as 112.60 yen on electronic trading platform EBS early on Monday but trimmed its losses on buying by Japanese importers and stood at 113.31 yen down a tad from around 113.40 yen in late US trading on Friday.
A 2.2% fall in Japan’s Nikkei share average, following a decline on Wall Street, prompted investors to trim risky yen carry trades, pushing down the dollar and higher-yielding currencies against the yen.
But Japanese importers bought the dollar aggressively, helping limit its losses, traders said.
In yen carry trades, investors use the low-yielding yen to finance purchases of assets with higher returns elsewhere. That kind of trade played a big part in the yen’s fall to a trade-weighted and inflation-adjusted 22-year low in June
Analysts believe the Fed may opt for an unusually big cut in rates from the current 5.25% to help restore confidence among banks that have become reluctant to lend to each other, leading to strains in money and credit markets.
“A September Fed rate cut is a done deal,” said Hiroshi Yoshida, a forex trader at Shinkin Central Bank. “The market is now focused on whether it will be by 25 or 50 basis points.”
The Fed usually moves in 25 basis point increments, but worries about exposures and commitments of banks to US subprime mortgages, asset-backed commercial paper and structured investment vehicles has caused money market trading to dry up.
While the interbank lending problems have affected sterling and euro markets as well, investors are increasingly turning negative on the dollar as the US economy shows most evidence of taking a hit from the housing problems.
The euro edged up 0.09% to $1.3778 edging back towards a high of $1.3853 struck in July — the highest since the single currency was first launched in 1999.
It was little changed at 156.08 yen after falling to as low as 155.15 yen on EBS earlier on Monday.
The high-yielding Australian dollar fell 0.6% against the yen and the New Zealand dollar slipped around 0.4% versus the Japanese currency.
Japanese economy shrinks
Government data on Monday showed Japan’s economy shrank 0.3% in April-June from the previous quarter, against an initial estimate of 0.1% growth.
The gross domestic product data reinforced expectations the Bank of Japan is likely to leave interest rates unchanged at 0.5% at a 18-19 September policy meeting.
“If signs emerge that the global market turmoil has a negative effect on the real economy, the BOJ might be forced to put off a rate hike this year,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
The market shrugged off the Japanese data, however, as investors were more worried about the health of the US economy, expecting the dollar’s yield advantage over the yen to shrink if the Fed cuts the benchmark interest rate.
The European Central Bank held interest rates at 4% last week, citing increased market uncertainty as the reason for its wait-and-see approach.
—Additional reporting by Masayuki Kitano