The dollar consolidated close to 1.47 against the Euro ahead of the US payroll data on Friday in cautious trading.
Following significantly weaker than expected data, the US currency dipped sharply to lows around 1.4820. US employment growth for December was held to 18,000 after an upwardly-revised 115,000 in November while unemployment rose sharply to 5.0% from 4.7% as the number of people looking for jobs increased.
There were monthly employment falls in the manufacturing, construction and retail sectors with the total payroll increase the lowest for four years. The ISM index for the services sector was little changed at 53.9 for December with orders and employment indices rising over the month.
The ISM data will provide some relief, but the employment data will continue to increase unease over economic trends and will maintain pressure for an aggressive series of interest rate cuts by the Federal Reserve.
The latest ECRI inflation index also dipped to a three-year low for December. Futures markets put the possibility of a 0.50% cut at the end of January at over 50% following the payroll data. The dollar will, therefore, remain vulnerable on yield grounds, although a substantial amount of easing has now been priced in.
Sterling dipped to lows of 1.97 against the dollar in early on Friday. The UK currency rallied back to levels above 1.98 after the UK and US data releases, but failed to hold the gains.
Sterling was also unable to sustain recoveries against the Euro as defensive currency demand increased due to global growth doubts. Sterling weakened back to test support below 1.97 against the dollar in early Europe on Monday.
The PMI index for the services sector rose to 52.4 in December from 51.9 in November. There was a stronger than expected reading for net consumer lending while mortgage approvals fell to 83,000 from 89,000.
The data was certainly not strong with overall business confidence weakening further, but there will be some relief that the PMI index held above the 50.0 level. There will still be strong expectations of an interest rate cut during the first quarter of 2008 and a series of cuts for the year as a whole while the decision for this month is liable to be very close.
Underlying Sterling confidence will remain fragile as there will certainly be some speculation over a cut this Thursday despite some immediate relief following Friday’s data.
The yen fell against 15 of the world's 16 most-actively traded currencies on speculation Japanese investors will send more money overseas in search of better returns. The currency snapped a seven-day advance against the dollar as banks and brokerages in Japan are seeking to raise 200 billion yen ($1.8 billion) of mutual funds this week focused on foreign markets, according to data compiled by Bloomberg.
The dollar also rebounded from a two-month low against the euro as technical charts suggested its decline has been too rapid.
"With Japan's rates low, Japanese individual investors will keep sending money abroad," said Yuuki Sakurai, general manager of financial and investment planning in Tokyo at Fukoku Mutual Life Insurance Co., which manages the equivalent of $41.5 billion in assets. "This will weigh on the yen."
The yen dropped to 160.57 against the euro at 8:12 a.m. in London from 160.09 late in New York on Jan. 4 and fell to 109.42 per dollar from 108.60. The yen declined to 8.614 won from 8.672. It weakened to 108.69 against Canada's dollar from 108.29. The currency may fall to 110 per dollar this week, Sakurai said.
European Central Bank President Jean- Claude Trichet and his Group of 10 colleagues may signal today that their efforts to calm money markets are making headway.
G-10 officials are meeting at the Bank for International Settlements in Basel, Switzerland, for the first time since the ECB and the Federal Reserve started a coordinated effort Dec. 12 to pump cash into the markets to reduce borrowing costs. Since then, there have been signs of recovery.
Companies' costs to borrow in the short term have fallen to a 22-month low, and commercial paper backed by collateral increased last week for the first time since August. Trichet said Jan. 5 that money-market tensions "have receded while remaining significant," and the Bank of Canada said a day earlier that "pressures" have eased.
"They're making some progress," Bill Gross, the founder and chief investment officer of Pacific Investment Management Co., said in a Bloomberg television interview from Newport Beach, California, Jan. 4. Trichet, 65, may underscore that view when he speaks at a press conference about 1 p.m. after meeting with policy makers including Fed Chairman Ben S. Bernanke, Chinese central bank governor Zhou Xiaochuan and Bank of Canada Governor David Dodge.
"Policy makers are breathing a collective sigh of relief that the year ended without a total meltdown," said James Nixon, an economist at Societe Generale in London.
Morning Market Rates:
(Indication prices only, not offer rates)
GBP/USD: 1.9659
GBP/EUR: 1.3369
GBP/AUD: 2.2495
GBP/CHF: 2.1896
GBP/ZAR: 13.5185
USD/JPY: 108.67
USD/ZAR: 6.8147
EUR/USD: 1.4605
EUR/ZAR: 10.1013
GBP/NZD: 2.5468
GBP/AED: 7.2260
GBP/CAD: 1.9737
GBP/THB: 65.64
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