NEWS / Foreign Exchange

USD Stabilizes Losses, Eyes Payrolls

11/1/2007 3:00 PM: EUR/$..1.4456 $/JPY..114.84 GBP/$..2.0832 $/CHF..1.1564 AUD/$..0.9176 $/CAD..0.9472

USD Stabilizes Losses, Eyes Payrolls

The dollar recovered slightly against the majors in the Thursday session, pushing the euro away from all-time highs just above the 1.45-level and containing its losses versus the sterling from breaching the 2.0870-mark. The greenback remains supported from tempered market expectations for further Fed easing following yesterday??™s neutral bias adopted in the FOMC statement. Although the deterioration in US economic fundamentals continues, the declines have been inconsistent and unevenly distributed.

In contrast to the robust Q3 GDP figures released on Wednesday, the economic data released today was largely on the softer side. The key soft spots in the economy continue to be housing and manufacturing, with the October manufacturing ISM falling to 50.9, its lowest reading since March and slipping closer to the 50-level, which distinguishes between expansion and contraction. The new orders index fell to 52.5, while the employment index was marginally higher to 52.0. The prices paid index jumped to 63.0 versus 59.0 from September, and was attributable to higher energy and commodities costs.

Meanwhile, personal consumption in September fell to 0.1%, down from 0.6% from August and personal income edged up slightly to 0.4% versus 0.3% in the previous month. The PCE index, the Fed??™s preferred gauge on inflation, ticked higher in September, with the core PCE index rising to 0.2% versus 0.1% from August and unchanged from the previous year at 1.8%. The headline PCE index increased by 0.2%, reversing a 0.1% decline a month earlier and rising to 2.4% on an annualized basis versus 1.8%. Weekly jobless claims drifted to 327k from 330k last week.

Market attention now shifts to the October jobs data, due out at 8:30 AM on Friday. With the ADP private sector payrolls boding positively for tomorrow??™s report, traders will scrutinize the October non-farm payrolls to gauge whether the Fed will likely maintain its neutral bias heading into the last policy meeting of the year. Consensus estimates are calling for NFP to slip to 80k, down from 110k from October. The unemployment rate is forecasted to remain unchanged at 4.7%. Also due out are durable goods orders and factory orders.

A strong labor report will solidify the FOMC??™s neutral bias and keep the Fed??™s hand in check for the rest of the year, while also raising speculation that the easing cycle may be behind us given lingering inflationary pressure. Nevertheless, we look for the dollar to remain under pressure amid persistent fears stemming from credit concerns. Market jitters have not subsided and were evident with today??™s analyst downgrade on Citigroup, a catalyst for the US equity sell-off which resulted in DJIA falling by over 1.5% and posting its largest decline since October 19th.