Oil's Surge Greases a Dollar Fall

RIVA FROYMOVICH / Wall Street Journal 7jun2008

The dollar fell again on the euro after the startling rally in crude-oil prices, the unemployment report and more signals from the European Central Bank of a rate increase.

		    52-wk 
	    $ per   change   	Per $
Euro 	   $1.576   up 18.0%    €0.6342
Yen 	 $0.009524  up 15.9%    ¥104.9979
Dollar index  79.5  down 8.5%

After more than a week of what looked like a building case for a bounce in the dollar against the common currency, the blocks shifted.

The major pressure came in a speech Thursday by ECB President Jean-Claude Trichet that sent the euro sharply higher against the dollar. Friday the euro was edging closer to $1.5800.

Mr. Trichet said that the upside risks to price stability have increased in the euro zone, and the ECB may raise interest rates at its July meeting.

On Friday, ECB Governing Council member Lorenzo Bini Smaghi said the market's reaction to Mr. Trichet's remarks is "in line" with the ECB's expectations for the next 30 days.

The euro was additionally supported Friday when light, sweet crude oil for July delivery on the New York Mercantile Exchange posted a record single-day gain. At the same time, the dollar's weakness was sending investors into oil as a hedge against the declining currency.

High oil props up inflation in Europe even more, further encouraging a rate increase there. In the U.S., however, the Fed has an employment problem that won't allow it to lift interest rates just yet.

The widening rate differential between the two regions is problematic for the dollar against the euro — and helped the euro reach its record high back in April at $1.6020 — because investors favor assets with higher yield.

Meanwhile, the developments pushed the Dow Jones Industrial Average down nearly 400 points, sinking the dollar against the yen with it. Traders go back into the lower-yielding yen during periods of uncertainty.

The dollar fell to an intraday low of 104.92 yen. The euro rose to almost a two-week high, to $1.5776. Against the Swiss franc, the dollar fell to its lowest mark since April 24, 1.0187 francs.

Friday afternoon in New York, the euro was at $1.5769 from $1.5599 late Thursday, while the dollar was at 105 yen from 105.94 yen. The pound was at $1.9700 from $1.9591, while the dollar was at 1.0192 Swiss francs from 1.0380.

"Momentum indicators are not yet pointing to a dollar that is in 'oversold' territory, and there is potential for further dollar slippage," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.

The next technical targets for the euro are near $1.5820 and back to $1.6020, he said.

Early Friday, the Labor Department reported the unemployment rate rose 0.5 percentage point to 5.5% in May, and nonfarm payrolls declined 49,000, near economists' expectations of a 60,000 drop.

"The initial sticker shock of the release is certainly bearish for the dollar. It adds fuel to Trichet's extremely hawkish commentary yesterday," said Jeff Gladstein, global head of foreign-exchange trading at AIG Financial Products in Wilton, Conn.

source: p.B14 6jun2008