The dollar has been under sustained pressure ever since the troubles in the US sub-prime mortgage market emerged. The Federal Reserve's response has been to lower interest rates, first by a half-point reduction in August and this week, a quarter-point cut, taking the base rate to 4.50 pct in order to shore up the economy. Now though it is starting to look like the Fed will stop there.
In the meantime, the fallout from the sub-prime market has continued, with the Fed forced to pump another 41 bln usd into money markets yesterday, its largest injection since the 50 bln it made after the September 2001 terrorist attacks on New York and Washington, prompting fears that the world's banking sector may be into further multi-billion dollar write-downs. Those concerns were accentuated by the news that Citigroup may be forced to slash its dividend to meet its capital ratio requirements. In recent bouts of mounting risk aversion, the dollar has benefited, but analysts think it will now take more uncertainty for the US currency to be supported.
Against this backdrop, the day's US jobs data, though keenly awaited, only managed to lift the dollar very briefly. It was revealed today that the US economy added 166,000 jobs in October, nearly double the 85,000 jobs economists surveyed by Thomson's IFR Markets had forecast.
The unemployment rate, taken from a separate survey of households, held steady at 4.7 pct in October.
"The report confirms the need for a Fed rate hold. Despite higher gas prices and falling home prices, consumers will remain firm with the strong employment market coming into the fourth quarter," said Myra Dsouza at Thomson IFR.
Paul Ashworth at Capital Economics said the strong report suggests the labour market is still holding up despite the recent credit crunch. "We still expect to see more signs of weakness in the coming months, but those signs might not arrive in time for a December rate cut -- we think January is still marginally the more likely time," he added. To some extent, growing expectations that the Fed may not cut rates any more is weighing on the dollar as the economy is then seen struggling along for longer.
Stephen Jen, global head of currency research at Morgan Stanley, is worried that the dollar's slide, fuelled by both cyclical and structural concerns, may become disorderly and could force the G7 group of leading industrial nations to act. "While we have had a bearish cyclical view on the dollar for most of this year, for the first time since 2002, we are becoming worried about a disorderly decline in the dollar," he said. "This is why we are raising the prospect of coordinated intervention," he added.