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January 06, 2006

Dollar Sinks as Jobs Blur Fed Picture
by Ashraf Laidi

The 71K upward revision in the November jobs report may have offset the weaker than expected December figure (108K vs expectaions of 200K), but the final outcome has deepened the dollar gloom.

The Euro is less than half a cent away from regaining its 200-day moving average, a feat not attained since May 2005.

Today's payrolls report would not have mattered for the recently damaged US dollar. Considering the 95% probability of a 25-bp rate hike in January priced by the market prior to this morning's report, a strong reading would naturally not have altered that probability. And given the fact that the following FOMC meeting is nearly 2 months away from today, it is too far ahead to make predictions far out based on a jobs report from December - which is 3 months lagged. Besides, going into the March 28 meeting, markets and the Fed would be equipped with data from the January and February labor reports, which reduce the relative importance of today's numbers.

Given the considerable certainty of a January 31 rate hike (current market probability at 80%), the probability curve can only change towards a decision to hold, a rude awakening for the dollar.

As for the Fed March 28 meeting (where we continue to expect no move), it remains too far ahead to serve as a reliable foundation for dollar bulls, especially given the Fed's increasingly data-dependent stance. If anything, the odds for a no change would likely increase the current 40-45% probability - again another dollar negative outcome.

Ashraf Laidi
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