NEWS / Fiscal Policy, Budget

Dollar waits for payroll evidence

The Euro edged stronger to 1.2720 ahead of the US opening on Thursday, but was unable to sustain the advance and drifted back towards 1.2680 later in New York with the currency testing support close to 1.2670 in early Europe on Friday.

The ECB increased interest rates to 3.25% from 3.00% following the latest council meeting. In the statement following the decision, the bank stated that monetary policy was still accommodative and that further interest rate increases would be required if the bank??™s forecasts are met. The ECB also stated that it would monitor inflation closely. This phrase falls short of strong vigilance which is used when the bank feels a rate hike is imminent and the overall stance suggest that the ECB will look to increase interest rates again in December. There will be doubts over 2007 policy which will lessen the potential for Euro buying given that a further increase to 3.5% is priced in.

The US jobless claims data was stronger than expected with a decline to 302,000 in the latest week from 319,000 the previous week. The correlations are fragile, but there will be slightly greater optimism over the Friday payroll report. The US currency will be vulnerable to selling pressure if the headline payroll increase is much below the 100,000 level, although the dollar has proved resilient to weak data over the past month. The wages data will also be important for Fed interest rate expectations with a figure above 0.3% increasing pressure for a further rise in interest rates.