It's difficult to isolate the impact of the recent debt-ceiling debate from the value of the dollar, with rationale argument concluding that the greenback has cheapened in face of longer-term budget concerns. What remains strange is, given that the European debt crisis is not only at the heart of the current bout of weakness but also only worsening, that the euro still hasn't cheapened below $1.4000. European political leaders see powerless in achieving a coordinated response other than repeated verbal ones. One politician today noted that the markets still needed convincing of the force of words from European leaders. Should euro bulls be forced to throw in the towel after so long, we could be in for a fast and furious ride to $1.3000.

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U.S. Dollar - The immediate reaction in the currency world following news of improving health within the labor market was to sell the dollar. That action lasted for no more than five minutes as dealers exchanged glances wondering why the dollar would weaken on good news finally went with their gut reaction. The dollar index remains lower on the day at 75.05 but it won't surprise me if losses against the majors don't turn in to a sharp rebound later in the day. The unambiguously positive employment report for July may not lead to a lasting turnaround in the stock market especially since the source of the problem is across the Atlantic. Still, a net gain of 117,000 jobs was beyond expectations, was dragged back by a loss of government jobs and felt the tailwind of a private hiring binge of 154,000 compared to expectations of 113,000. To boot, the report came complete with a healthy upwards revision to the June reading, with hiring for the month of June rising to 46,000 and replacing a previously recorded increase of just 18,000.

Euro - Overnight losses for the single currency have worn off as investors accepted ongoing losses for stock markets where sentiment has been roiled by increasing discomfort with the approach to the sovereign debt crisis by European governments. The euro slid to $1.4073 in Asia as that region's stocks saw losses of 4% on the day taking the earlier lead of weakness in American shares. The ECB reluctantly resumed bond-buying following its monthly meeting on Thursday after a four-month hiatus but failed to rouse confidence given it only purchased Irish and Portuguese issues. The central bank remains frustrated at regional political failure to ring-fence the sovereign debt crisis and doesn't want to buy national bonds where it feels insufficient effort has been made to mend the problem. Note the turn of phrase of the Belgian central bank chief who said noted that it makes no sense to "pour water in to a bucket with a hole in it." The euro advanced against the dollar before U.S. employment data to trade at $1.4214 before the dollar turned tail forcing the single currency back to $1.4144.

Japanese yen - The Nikkei newspaper hazarded a guess at the volume of yen sales in Thursday's intervention to stem its value. The paper didn't cite a source but said the bank of Japan independently bought $51 billion against the yen whose strength understandably failed to abate with global indices still bleeding on Friday. The yen rose against the dollar to ¥78.34 at the overnight high and eased to ¥78.63 pending an update on U.S. employment. In the event the dollar surged towards unchanged on the day and recently traded at ¥78.72. Against the euro the yen advanced to ¥111.55.

British pound - At $1.6300 the pound was higher against the greenback before labor data from Washington and had earlier lost ground as risk aversion remained a dominant theme. The pound faced fresh data in the form of a series of cost readings facing producers for July. Input costs accelerated to a 0.6% pace from 0.2% in June for the month and were 18.5% higher than a year ago. Output prices rose mildly to stand 5.9% higher than last July while core prices rose 0.3% on the month leaving them 3.3% higher than this time last year. The euro reversed some of its earlier in the week losses against the pound reverting to but 86.90 pence.

Canadian dollar - Statistics Canada said that fewer people participated in the labor market last month forcing the unemployment rate down by two-tenths to 7.2% while the economy added a net 7,100 new hires. The reading came in at only half the market forecast but there were decent gains from employers who boosted their workforce within construction, transportation and warehousing sectors. The dollar came off its worst level in two weeks against the greenback with gains accelerating on the warmer waters from the U.S labor data rising to buy $1.0233 U.S. cents.

Aussie dollar - The better reading on the U.S. labor market as might be expected, inspired something of a rally or the Australia dollar. However, the Aussie has fallen out of bed and landed more awkwardly than any other major currency on the back of rising risks to the global economy stemming from rising sovereign debt woes. Today the Reserve Bank slashed its growth forecast for the year from 3.25% for 2011 down to just 2%. Inflation meantime will remain elevated, but as the central bank has repeatedly stated, the threat from inflation plays second fiddle to rising global tensions. Accordingly yields have tumbled down under while the Aussie has been slammed on account of expectations of narrowing yield premiums and on reduced demand for its exports. In its quarterly forecast today the Reserve Bank warned that European and U.S. debt crisis could unfold in "disorderly and disruptive fashion." The Aussie earlier tumbled to $1.0482 U.S. cents while the improvement in attitude after the U.S. employment report inspired a rebound to $1.0488 cents.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com       

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