4 August 2006, 15:41  Dollar drifts higher

The dollar drifted higher ahead of the crucial US labour market report at 12.30 GMT which is expected to determine the case for a US rate hike next week. Steve Pearson at HBOS described the report as the defining event of the day. Expectations for the numbers of non-farm jobs created in the US during July vary widely from as low as 71,000 to as high as 225,000. In June, there was a disappointing rise of just 121,000. "This is a relatively wide dispersion raising the risk of a relatively large market reaction," said Pearson Analysts polled by AFX News, meanwhile, predict a rise around the 155,000 level. Another crucial factor suggesting sharp market reaction to the data, is the fact that investors are pricing in a 46 pct chance of a quarter point US rate hike on Tuesday, next week. "A strong number would see pricing cross the 50 pct threshold," said Pearson who predicts job creation of around 190,000 closer to the upper end of projections. Analysts at BNP Paribas predict a much smaller rise of 115,000. "A weak US labour market report will have financial market consequences and eliminate fears of an Aug 8 rate hike. Accordingly, a weak labour market report will convince markets that rate differentials will shrink for the remainder of this year putting the dollar under pressure," they said in a research note. The dollar slipped yesterday after the twin rate hikes from the European Central Bank and Bank of England. As the trading day started, selling pressure lost momentum, in turn helping the dollar come back slightly. The ECB raised the key refi rate by a quarter point to 3.00 pct in a widely expected decision, but the BoE hike was a surprise. Both central banks followed up with commentary interpreted as hawkish, thus propping up the euro and pound. Today, some of these gains were pared, especially in the euro but both currencies remain well-bid amid bright prospects of further rate hikes in both cases. The pound, in particular, benefited from fresh buying. But BNP Paribas analysts said markets appear to have got carried away with UK rate hike prospects. November is now seen likely as the month for another increase in the UK.

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