The dollar headed for its third week of gains against the yen and euro in London on optimism the U.S. job market is strengthening, prompting the Federal Reserve to raise its target interest rate from a four-decade low this year. Keeping the benchmark rate at 1 percent won't be necessary once the economy achieves sustained growth and hiring, Atlanta Federal Reserve Bank President Jack Guynn said in a speech late yesterday. A Labor Department report today is expected to show the U.S. last month added the most jobs since November 2000. ``There is a creeping suspicion the U.S. is going to have to raise interest rates sooner rather than later,'' said Thomas O'Malley, head of global currency portfolio management in San Francisco at Barclays Global Investors, which oversees more than $1 trillion. ``Naturally, that helps the dollar.''
Against the euro, the dollar was at $1.2192 at 7:53 a.m. in London, from $1.2203 late yesterday in New York, according to EBS prices, a weekly gain of 2.3 percent. The U.S. currency was trading at 111.17 yen from 111.12, up 1.9 percent on the week. It earlier rose to 111.43, its strongest since Nov. 3. The economy added 130,000 jobs last month, according to the median estimate of 65 economists surveyed by Bloomberg News. Initial U.S. jobless claims fell to 345,000 in the week ended Saturday, a Labor Department report showed yesterday. ``If my forecast for robust economic growth materializes, then, at some point, a fed funds rate of 1 percent will no longer be the best policy,'' Guynn said in the text of a speech to real estate executives in Atlanta.
Increasing Bets
In a sign investors are increasing bets the Fed may raise rates later this year, the September Eurodollar futures contract yielded 1.49 percent in Singapore, up from 1.43 percent a week ago. Eurodollar futures are a gauge of three-month lending rates, and their yields have averaged 24 basis points higher than the Fed's target rate during the past 10 years. The September rate is 35 basis points higher than the current three-month lending rate, suggesting investors expect a rate increase by then. One catalyst for an end to the dollar's two-year decline ``is for the Fed to hike earlier than expected,'' said Monica Fan, head of European currency strategy in London at RBC Capital Markets, in a televised interview. Should the Fed raised rates in the second quarter, that would boost the U.S. currency, she said. Japanese Finance Minister Sadakazu Tanigaki today said the yen is falling against the dollar because traders and investors are ``correcting'' their yen-buying positions.
Targeting 115
The yen has fallen 5.5 percent since trading at a 41-month high of 105.17 on Feb. 11. It fell yesterday even after a Ministry of Finance report showed Japanese companies were optimistic for a second quarter between January and March. ``Japanese authorities would be pleased to see the yen above 115,'' said RBC's Fan. ``They've got no intention of letting up on their intervention.'' Japan sold 10.5 trillion yen ($95.3 billion) in the two months ended Feb. 26 to protect exporters, more than half the record amount spent last year. The budget committee of Japan's lower house parliament 40 trillion yen in additional funds to help weaken the yen in the fiscal year beginning April 1. The move comes after parliament endorsed a 21 trillion yen expansion of the government's limit on currency sales last month for this fiscal year.
`Planned Landmines'
``The BOJ has parked a number of bids, or planned landmines, to absorb any fall below 110'' yen to the dollar, said Uwe Parpart, senior market strategist in Hong Kong at Bank of America Corp. The yen may fall to 113 next week, he said. Hiroshi Watanabe, head of the international department at Japan's Ministry of Finance, yesterday said it will take ``a little while'' before the yen's three-week slide ends. The Bank of Japan sold the currency in record amounts last year to stem its appreciation. Zembei Mizoguchi, vice finance minister for international affairs, declined to comment on whether Japan was selling yen. The yen was at 135.80 per euro, from 135.57 yesterday, when it had its biggest drop in more than a week. The dollar's rise today may be hindered by concern the February jobs report will fall short of expectations. In each of the past two months, the number of jobs added was below estimates.
`Especially Vulnerable'
Payrolls rose 112,000 in January, less than the 175,000 jobs forecast. While the gain was the most in three years, payrolls rose an average 196,800 a month during the record 10-year expansion that ended in March 2001. ``The dollar is especially vulnerable to a weak number, and a weak number may be just the average expectation,'' said Peter Clay, currency strategist in Sydney at ABN Amro Holding NV. A weaker-than-expected number ``could take the dollar below $1.2300'' against the euro. Mary Davis, a currency strategist in London at Credit Suisse First Boston, said that given the dollar's recent gains, the currency isn't likely to get much of a boost from the payrolls report unless it shows the economy added ``north of 200,000 jobs.'' The dollar has risen 6 percent gain against the euro since dropping to a record low of $1.2930 last month. //www.bloomberg.com