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Dollar Soars After Unemployment Rate Drops

Friday, 04 Dec 2009 10:06 AM

 


NEW YORK -- The dollar leaped higher Friday after the government said the U.S. unemployment rate dropped to 10 percent in November, leading traders to weigh chances that the Federal Reserve might begin raising interest rates sooner than they had expected.

The 16-nation euro dropped to $1.4953 in New York morning trade from $1.5092 late Thursday in New York. Before the government's release at 8:30 a.m. in New York, the euro had traded above $1.50.

The British pound rose to $1.6605 from $1.6566, while the dollar leapt to 89.57 Japanese yen from 88.21 yen.

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Against a basket of six currencies, the dollar was up 0.8 percent since the government's announcement.

High unemployment is one factor keeping the Federal Reserve from raising U.S. interest rates, currently at a record low range near zero, among the lowest in the world.

It's very cheap for investors to borrow dollars, and analysts say traders are using the dollar to fund "carry trades," which weigh on the currency. In a carry trade, an investor borrows dollars in order to buy higher-yielding assets and makes money on the difference in interest rates.

But if unemployment eases faster than expected, that could prompt the Fed to start raising rates before most analysts expect, which is the second half of next year or perhaps even 2011.

Investors are "reassess(ing) the trajectory of Fed policy in light of evidence of light at the end of the tunnel of long and deep job losses," said Marc Chandler of Brown Brothers Harriman, and an interest-rate hike in the second quarter of 2010 "is not being ruled out."

Once the Fed starts hiking rates and curbing its extraordinary asset purchases, "we expect the dollar to find great traction," Chandler said.


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