The dollar fell to the lowest in a month against the euro and weakened versus the yen after a government report showed the U.S. economy unexpectedly lost jobs last month for the first time in four years.
The U.S. dollar index comparing the currency with its six primary peers fell to the lowest in 15 years as the payroll data raised speculation the housing slowdown and credit market turmoil are spilling into the broader economy. The yen rose against the 16 most-active currencies as investors sold risky assets to pay back loans made in Japan. Global stocks fell.
``The things the Federal Reserve needs to justify two rate cuts this year are falling into place,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``This is enough of a loss in momentum to put on a rate cut in September. We're seeing a combination of dollar weakness and risk aversion that's benefiting the yen.''
The dollar fell 0.6 percent to $1.3768 per euro at 4 p.m. in New York. The U.S. currency also declined 1.7 percent to 113.41 yen and earlier reached 113.13. The dollar touched $1.3798 per euro, the weakest since Aug. 9. It dropped to a record low of $1.3852 per euro on July 24.
The U.S. currency declined 1 percent against the euro and 2 percent versus the yen this week as the difference in yields between a U.S. two-year Treasury note compared with a comparable- maturity German bund was lower for the first time since 2004.
U.S. Treasury Secretary Henry Paulson said the decline in payrolls during August was ``not totally surprising.'' He expressed confidence that the economy will still expand in the second half of the year.
Euro and Dollar
The yen has gained 6.9 percent against the euro and 9.3 percent versus the dollar since Bear Stearns Cos. said on June 22 it would bail out a hedge fund that lost money on securities related to loans to homeowners struggling to make payments in the worst housing recession in 16 years.
Investors since then have fled the asset-backed money market and corporate debt while banks curbed lending, forcing global central banks, including the Fed and European Central Bank, to supply cash to ease the credit crunch.
``It's the first clearly recessionary signal out of the economy, and a sign that the subprime problems have crept into the real world,'' said Boris Schlossberg, senior currency strategist in New York at DailyFX.com. ``We'll see a global slowdown led by a U.S. slowdown, and a moratorium on global rate hikes. The focus will begin to shift away from the notion of safe haven in the U.S. to the story of the U.S. recession.''
Schlossberg forecasts the yen may gain to 111 per dollar within weeks.
Non-farm payrolls decreased by 4,000 in August from a revised gain of 68,000 a month earlier, the Labor Department in Washington said. It compared with the median forecast of a 100,000 increase in a Bloomberg News survey of 88 economists. The unemployment rate held at 4.6 percent.
This week central banks from the U.K., the 13-country euro region, Canada, Australia and South Korea kept rates unchanged as they assess how the credit squeeze will affect economic growth.
Interest-rate futures show a 76 percent chance the Fed will cut borrowing costs to 4.75 percent from 5.25 percent at its Sept. 18 meeting, up from no chance a month ago. The odds of a reduction to 5 percent are 24 percent.
``It added significantly to the dollar-negative sentiment,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``The Fed rate cut at this month's meeting is a lock. The question is whether the central bank will cut by 25 basis points or 50 basis points.''
The New York Board of Trade's dollar index fell earlier to 79.841, the lowest since September 1992.
Atlanta Fed President Dennis Lockhart said yesterday he hasn't seen ``conclusive'' signs of a housing spillover into the broader economy and warned that inflation has yet to be contained. St. Louis Fed President William Poole said it's not clear yet that the economy will ``nose dive'' and he's not sure of the right response to housing and financial turmoil.
The pound rose 0.2 percent to $2.0283, gaining for a third day versus the dollar, as the yield advantage of the two-year British note increased 9 basis points, or 0.09 percentage point, to 133 basis points over a comparable-maturity U.S. Treasury security.
European Central Bank policy makers signaled their intention to raise interest rates further to contain inflation once financial-market turbulence has abated.
`Adjusting Interest Rates'
The ECB is ``in a process of adjusting interest rates'' and ``this process hasn't ended yet,'' council member Axel Weber said at a conference in Frankfurt. The ECB, which shelved a planned increase yesterday to leave its benchmark rate at 4 percent, has a ``determination to act in the future whenever it is necessary,'' President Jean-Claude Trichet said at the same event.
The yen traded at 156.19 versus the euro, from 157.95 yesterday. It gained 2.1 percent versus the New Zealand dollar and the Australian currency, two favorites of the so-called carry trades where investors borrow money in countries with low interest rates and buy assets in higher-yielding markets.
The Standard & Poor's 500 Index declined 1.6 percent and the Dow Jones Industrial Average fell 1.8 percent.
Japan's 0.5 percent target lending rate is the lowest among industrialized nations and compares with 8.25 percent in New Zealand and 6.5 percent in Australia.
Barclays Capital Inc. strategist Toru Umemoto, the most accurate yen forecaster in 2006, according to a Bloomberg News survey, raised his forecast for the yen to 109 per dollar from a previous estimate of 114.