Dollar Weakens On Sluggish Wage Data

By James Ramage 

        The dollar slid against the euro Friday after a quarterly measure of U.S. labor costs indicated stagnating wages, casting some doubt on the Federal Reserve's plans to raise rates in the coming months.
        Despite the daily move, the U.S. currency rose against the euro in July, as well as against most developed-market currencies.
        The dollar weakened 0.5% against the common currency, as one euro bought $1.0986 in late-afternoon trade. In July, the greenback gained 1.4%.
        Currency markets have gyrated in recent months amid an uncertain outlook for U.S. and global growth, as well as questions about whether the Fed will raise the short-term benchmark interest rate in September as many economists believe. Higher interest rates would make the dollar more alluring to investors.
        Earlier in the week, investors added to their bullish dollar bets after the Fed signaled that the bar for a rate increase as early as September was low, while underlying data for gross domestic product showed stronger U.S. consumer spending and inflation. But the second-quarter U.S. employment-cost index caught investors off guard at a time when many anticipated the dollar was ready to resume its ascent next week on a strong July jobs report.
        "ECI was a huge shock; no one was expecting a 0.2%," said Steven Englander, head of developed-market currencies strategy at Citigroup Inc. "People are now thinking this number will give the Fed pause...that doves on the Fed may rethink their full-employment estimate."
        The U.S. employment-cost index, a measure of workers' wages and benefits, rose a seasonally adjusted 0.2% in the second quarter from the first quarter, the Labor Department said Friday. The gains marked the smallest quarterly rise since record keeping began in 1982, and fell below economists' expectations of a 0.6% increase.
        Even though the labor market has tightened in recent months, wage growth remains weak, something Fed Chairwoman Janet Yellen pointed out following the central bank's June policy meeting. Some analysts say tepid wage growth could delay a rate increase.
        But more broadly, the dramatic move against the euro on Friday reflects how market sentiment on the dollar has evolved since mid-March, as investors have grown far less certain about when the Fed will raise borrowing costs. While the greenback's rise has mostly stagnated against the euro and the yen, investors instead have searched for opportunities for dollar gains in emerging markets and the currencies of countries tied closely to raw-material exports as China's economy has slowed and commodity prices have slumped.
        "The overall picture is still one of broad-based dollar strength, but you have more undercurrents making some currencies move much weaker against the dollar," said Scott Mather, chief investment officer of the U.S. core strategy at Pacific Investment Management Co.
        Pimco, which manages $1.6 trillion, maintains a steady weighting in its portfolios of a basket of currencies it expects will weaken against the dollar, which includes the euro, yen and some emerging-market currencies. The asset manager still expects the Fed to raise interest rates in September.
        Simon Derrick, chief market strategist at BNY Mellon, said the quarterly report isn't likely to change investors' thinking on the dollar for long. Light trading volumes are exaggerating moves in the foreign-exchange market, he said.
        "Given we're a week away from nonfarm payrolls, clearly people are looking for any kind of signs about whether the Fed will move in September or December," Mr. Derrick said. "It says more about how on edge the markets are than about some radical shift in expectations for the Fed or in sentiment on the dollar."
        The U.S. currency slipped 0.2% against the yen to Yen123.89 for the session, but has increased 1.1% since June.
        The Wall Street Journal Dollar Index, which compares the greenback against a basket of 16 widely traded currencies, dropped 0.2% to 88.54 on the wage data, but has gained 2.2% over the past month.
        Write to James Ramage at james.ramage@wsj.com
        (END) Dow Jones Newswires

        July 31, 2015 16:15 ET (20:15 GMT)

#FX
#Forex
#SalesForex
#DollarWeakens
#SluggishWageData
#StagnatingWages
#LaborCost
#RawMaterialExports