The dollar fell against the euro and yen after the US unemployment rate rose more than expected to a four-year high in August, indicating the economy may not recover soon and sending stocks tumbling.
Sluggish growth, which comes even after the Federal Reserve cut interest rates seven times this year, is curbing demand for dollar-based assets. August's jobless rate suggests Fed policy-makers may cut again their benchmark 3.5 percent benchmark rate, analysts said.
"The knee-jerk reaction is to sell the dollar," said Susan Stearns, a foreign exchange director at Bank of Montreal. The jobless rate "compounds the negative sentiment in the US and underscores that there's more work for the Fed" to stimulate the economy.
The US currency fell for a second day against the euro, declining 1.2 percent to US$0.9068 per euro from US$0.8957 late yesterday. It sank to ?120.13, snapping three days of gains, from ?120.8 on Friday. The dollar is still up 0.6 percent against the euro this week and 1.1 percent against the yen.
All three major US stock indexes tumbled after the unemployment report, adding to the dollar's declines by reducing investors' demand for the currency for a second day.
"It's tough holding dollars when US asset markets are getting hit as hard as they are," said Gregory Salvaggio, vice president of trading at Tempus Consulting in Washington. "People are becoming more bearish" on the US economy.
That could weaken the yen as investors shun Japanese assets.
"There is no fundamental economic reason for the yen to strengthen," said Stearns. "Another contraction in Japan's economy is fundamentally negative." Still, Japan's currency is 3.8 percent stronger against the dollar this quarter. The economic slowdown has forced Japanese banks and businesses to bring back money held overseas to shore up their finances by the end of the fiscal half-year on Sept. 30, said Rod Davidson, who helps manage about US$1 billion as head of fixed income at Murray Johnstone Asset Management in Glasgow.
Companies may keep bringing money back into the country in the next few weeks, supporting the yen, according to Davidson and other investors.
The US unemployment numbers follow reports Thursday that also indicated the economy remains sluggish. More people collected unemployment benefits last week than at any time in the past nine years and a National Association of Purchasing Management gauge of non-manufacturing US businesses unexpectedly fell in August.
"We're getting a series of reports that suggest we've yet to have a positive impact from the monetary and fiscal stimulus that's been in place," said Bob Sinche, head of global currency strategy at Citibank. "People are wondering if this is going to be a sustained period of disappointing growth, and the equity market is trading near April lows, another problem for the dollar."
Fed policy makers have lowered the benchmark lending rate by 300 basis points this year in a bid to bolster the economy. The cuts have put the key US rate below Europe's benchmark of 4.25 percent and diminished returns on US dollar deposits, damping demand for the currency, analysts said.
Yields on overnight futures contracts show investors expect another quarter-point interest rate cut by the end of next month.
The Fed's next policy-setting meeting is scheduled for Oct. 2.
"People are increasingly concerned whether the Fed cuts will be effective," said Sinche.
The dollar also fell against the British pound to US$1.461 per pound from US$1.4571, and against the Swiss franc to SF1.6737 from 1.6880. It rose against the Canadian dollar to C$1.5655 from C$1.5576.
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