Dollar soars after US jobless rate drops; investors weigh possible earlier rate hike

Dollar soars after unemployment rate drops

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 $1.4827 in late New York trading from $1.5092 late Thursday. Before the government’s release at 8:30 a.m. in New York, the euro had traded above $1.50.

The British pound slid to $1.6429 from $1.6566, while the dollar leapt to 90.70 Japanese yen from 88.21 yen.

Against a basket of six currencies, the dollar was up 1.6 percent since the government’s jobs report.

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

It is relatively 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 falls faster than expected, that could prompt the Fed to start raising rates sooner than analysts expect, which has been 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.

On Friday, the Labor Department said the unemployment rate fell from 10.2 percent in October. Employers also cut the smallest number of jobs since the recession began. The economy shed only 11,000 jobs. The data “is a sign that the economic recovery may be gathering momentum,” said analysts from research firm Capital Economics in a note. But they cautioned that “five months after the recession ended, the economy is still shedding jobs.”

The dollar over the past year and a half has tended to trade inversely to stocks as investors sought a haven amid a meltdown in riskier emerging markets and U.S. equities. Buying the dollar allows investors access to the super-safe, extremely liquid market for short-term U.S. Treasurys. Since March, the low-yielding dollar has suffered as stocks, commodities and emerging-market currencies soared as investors become increasingly confident with the idea of a global recovery.

That relationship may finally be winding down, said Matthew Strauss, senior currency strategist at RBC Capital in Toronto. As the risk of a double-dip recession in the U.S. recedes, he said, investors are going to be increasingly comfortable buying the dollar due to better-than-expected economic and corporate data.

“As the economic recovery gains traction… the market is becoming more comfortable in following data more along the economic fundamentals,” he said.

Strauss concurred that investors were also pricing in the possibility that the Fed would hike rates sooner than the second half of next year if the job market continues to improve.

In other trading, the dollar edged up to 1.0589 Canadian dollars from 1.0536 late Thursday after the Canadian government said the unemployment rate fell to 8.5 percent in November from 8.6 percent the previous month. The economy gained 79,000 jobs.

The dollar rose back above parity with the Swiss franc. In late trading, the dollar bought 1.0188 Swiss francs compared with 99.89 francs Thursday.