EUR/USD Lifted By Higher U.S. Jobless Rate

June 6, 2008

The euro spiked upward to $1.5699 on the 0.5 percentage point jump in the U.S. jobless rate to 5.5%. While all other aspects of the monthly labor report were close to expectations and the 5.5% unemployment rate seems reasonable if not predicted, the data depict an economy that is skirting along the edge of a possible recession. The Fed has stopped cutting rates but is poorly positioned to start raising them in tandem with other central banks. If the ECB raises its rate next month as strongly hinted, it would be the first tightening in 13 months and unlikely to be an isolated one-off move. In time, that is probably no later than October, there will probably were be another rate hike, and even that is unlikely to be the final one. Rate spreads between the United States and Euroland are thus set to widen, not shrink as was widely assumed just a month ago.

The 0.5 ppt increase in the jobless rate was the largest month-on-month advance since February 1986, and 5.5% is the highest jobless rate since October 2004. The 47K monthly pace of decline in jobs between November 2007 and May 2008 is the greatest rate of decline for any six-month interval since the six months to August 2003 and contrasts with a +104K per month in the six months to October 2007. However, the average drop in U.S. jobs of 38.5K per month in April-May is down from 82K per month in 1Q08. New jobless claims of 368.5K per week during the past four weeks versus 367.5K in the four weeks to May 3rd and 376.75K per week in the four weeks to April 5th also suggest that labor market conditions are at least not worsening.

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