Currencies: Dollar Seen Weakening as Market Reassesses Rate Outlook - TheStreet

Following today's employment report the dollar has fallen against all major currencies as traders absorb the possibility of a reduced focus on further interest-rate rises in the U.S.

Nonfarm payrolls in May rose 231,000, well below expectations. The unemployment rate rose to 4.1% and average earnings rose by 0.1%. These data were seen as consistent with some slowing of the economy and are sparking a continued strong rally in equity and bond markets.

The impact on the dollar is less clear-cut. Some traders feel that the dollar will benefit from signs of slowing. Others disagree. "This will weigh on the dollar," said Mitul Kotecha of

Credit Agricole Indosuez

. "Euro/dollar has popped above 94 and the dollar will be under pressure in the coming weeks."

Kotecha believes the dollar's strength has been based on interest rate expectations and today's data weaken the likelihood of further rises. The employment report "will certainly result in a paring back of rate expectations," Kotecha said.

Dollar/yen is opening at 108.00, having briefly broken the 109 level in earlier trading. The euro/yen cross has improved sharply to 102.40.

As noted yesterday the yen is being buffeted by negative developments on the financial and political fronts. Apart from the collapse of

Daihyaku Mutual Life

earlier in the week, today came news that other insurance companies were also reporting significant losses.

In addition, Prime Minister

Yoshiro Mori

has now dissolved the lower house of the Japanese parliament. Campaigning has begun ahead of elections set for June 25. "The economy is finally showing signs of recovery but there are still huge gaps among regions and sectors and we need to take solid steps to ensure stable growth," Mori said.

Despite these signs of weakness, there is further indication that the

Bank of Japan

may soon end its "zero interest rate" policy. "To push the economy forward, we have to correct this unusual situation," said BOJ Governor

Masaru Hayami

. He did not give any indication of when this change in policy might be put into effect.

The dollar has lost ground vs. the euro and is opening at $0.9435. Analysts expect that the

European Central Bank

will raise interest rates for the euro zone by 25 basis points at next week's meeting.

Sterling is firmer at $1.5055. The euro/sterling cross has moved higher to 0.6265. The

Bank of England

is not expected to push rates higher next week.

Dollar/Swiss franc has lost ground to 1.6690. The euro/Swiss franc cross has moved up from last night's closing level at 1.5750.

The Canadian dollar has held onto yesterday's gains and has strengthened this morning. The U.S. dollar is opening lower at C$1.4855.

The Australian dollar has gained overnight and is now at $0.5760. The New Zealand dollar is higher at $0.4615. Both of these currencies are fundamentally weak at the moment and are expected to lose ground as institutions continue to hold export revenues in U.S. dollars.

The South African rand has continued its better tone and is now at 6.92. Some support for the rand came from the announcement that the central bank was able to increase its forex reserves in May.