Spike In Dollar, Prompted By Strong Job Growth

Sydney Morning Herald

Friday March 14, 2008

Clancy Yeates

THE Australian dollar spiked yesterday in response to stronger than expected employment growth and continuing rejection of the greenback.

The Australian currency jumped more than US0.5c minutes after February's labour force figures were released, showing 36,700 jobs were created and taking unemployment to a 33-year low of 4 per cent.

Currency markets initially interpreted the big jump in employment - double market expectations - as evidence of continued buoyancy in the domestic economy, in contrast with recent signs of a slowdown.

But economists said the job figures did not change predictions that the economy is slowing, because the data reflected hiring decisions made in late 2007 to early 2008. "The dollar's rise was a knee-jerk reaction, because employment is a lagging indicator," said Stephen Roberts from Lehman Brothers.

The Australian dollar reached a peak of US94.18c in afternoon trading but had eased to US93.51c by 5pm.

The afternoon fall occurred because markets came to the view that the figures were tied to past economic conditions, compounded by a poor day's trading on the local sharemarket, Mr Roberts said.

Further fuelling the Australian dollar's rise, traders have deserted the US dollar in droves. The greenback reached a record low against the euro and its lowest point against the yen since 1995, said Westpac's chief currency strategist Robert Rennie.

"There's effectively been a collapse in the US dollar, particularly in Tokyo ... the demand for a store of wealth outside of the US dollar at the moment is really quite intense" he said.

In a volatile few days on currency markets, the dollar has been caught between conflicting forces. The economy's relatively positive growth outlook has caused bouts of confidence in the currency, while fears that international credit turmoil could undermine such growth have caused it to dip.

A senior market strategist at St George Bank, Besa Deda, said the probability of a Reserve Bank rate rise in May had increased from 17 per cent to 27 per cent in response to the strong February employment figures.

Recent signs of a slowing economy include declining business and consumer confidence, and the Reserve Bank's observation of slowing household consumption when it raised rates last week.

© 2008 Sydney Morning Herald

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