by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar was confined to narrow ranges around 1.56 ahead of the US employment data on Friday, but then weakened sharply in US trading for the second day running.
The headline US employment change was close to expectations with a decline of 49,000 for May after a revised 28,000 drop the previous month. There were further falls for manufacturing and construction jobs while retail employment also fell.
The surprise element was a jump in the unemployment rate to 5.5% from 5.0% the previous month which was the sharpest one-month increase for 22 years. There was a strong rise in the workforce during the month which suggests additional demand for jobs as incomes come under pressure and costs rise. In this context, the data may not suggest further deterioration in the economy. Nevertheless, the rise will revive recession fears and will also make it much more difficult for the Federal Reserve to justify any increase in interest rates.
The unemployment data will undermine dollar confidence in the short term and recession fears will persist with markets downgrading yield expectations.
The Euro-zone data was also weaker than expected with a second successive monthly decline in industrial output of 0.8%, although the impact was limited as markets continued to focus on the ECB interest rate decision the previous day.
With oil prices also rising sharply during the day and ECB members taking a tough stance, the dollar weakened to lows around 1.5750 against the Euro. There was criticism of the ECB policy by the Portuguese government and tensions are liable to increase which will unsettle the currency to some extent.
The Nikkei was firm on Friday, supported in part by a weaker yen. The emphasis on a potential for higher interest rates by the ECB will tend to maintain flows into high-yield currencies which will unsettle the Japanese currency.
The Japanese finance ministry stated that it would monitor exchange rate movements which may curb aggressive yen selling in the near term. The dollar was testing levels just above the 106.0 level in Asian trading on Friday.
The dollar held firm in Europe, but the yen gained some traction after the US employment report, especially as there was a sharp decline on Wall Street which discouraged carry trades. The yen strengthened to highs beyond 105.0 following the data. Increased fears over the US and European economies will offer some underlying yen support.
There were no significant domestic developments on Friday with international trends dominant, although a further decline in retail sales by the John Lewis group unsettled confidence. Sterling remained generally weak against the Euro with lows around 0.80, although it did exhibit some resilience. The UK currency also tested levels above 1.97 against the US dollar.
Underlying confidence in the UK economy will remain very weak in the short term, especially as there has been a renewed increase in energy prices which will increase pressures on spending and risk an increase in political protests.
The economic data will be watched closely next week with the latest producer prices data due on Monday.
The Swiss franc weakened to low around 1.6220 against the Euro on Friday, but then strengthened to test levels below 1.61. Risk appetite was damaged by a much sharper than expected increase in US unemployment and a sharp decline on Wall Street. Confidence was also damaged as oil prices rose sharply to record highs.
The dollar hit resistance above the 1.04 level against the franc and dipped sharply to lows near 1.02 in US trading.
There will be increased global recession fears in the short term which will tend to boost demand for the Swiss currency, especially if there is evidence if further deterioration in the Euro-zone. National Bank member Jordan also stated increased fears over the inflation outlook with a comment that the data was a negative surprise. A firm central bank stance would provide some franc support.
The domestic influences were limited, although there was a dip in the construction PMI index which will cause some unease over the housing sector. Commodity prices rebounded as the US currency weakened and this will underpin the Australian dollar in the short term with a fresh challenge on levels above 0.96 on Friday.
These trends were exacerbated in US trading following the US employment report as the US currency came under renewed pressure and there was a sharp rally in gold prices. The Australian currency was still struggling to overcome resistance above the 0.96 level, but pushed higher in New York.