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Analysis: Dollar weakens
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June 5, 2000: 11:30 a.m. ET
Slowdown in U.S. economy weakens dollar; euro soars on U.S. jobs report
By Gordon Platt
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NEW YORK (CNNfn) - The apparent slowdown in the U.S. economy is hitting the dollar, which could be entering a period of extended weakness, currency traders and analysts said.
The dollar rode rising rates and a booming economy to a record high against the euro one month ago, but the situation has changed fundamentally, they said.
"The market is having second thoughts about the need for further Federal Reserve rate hikes following Friday's weak employment report," said Marc Chandler, chief currency strategist at Mellon Financial.
Two weeks ago, market participants were sure the Fed would raise rates by at least a quarter point, and more likely a half point, at their two-day meeting at the end of June. "Now they are less than 50 percent confident that there will be any rise," Chandler said.
Higher unemployment signals economy slowdown
A series of recent U.S. economic reports have come in on the weak side, but it was the May employment report that provided the strongest evidence to date of a slowdown. The unemployment rate rose to 4.1 percent from a 30-year low of 3.9 percent in April, while hourly wages rose only 0.1 percent. Economists said all aspects of the report were weaker than expected.
"There are clear signs of a U.S. slowdown, which brings the end of Fed tightening into sight," said David Solin, partner at Foreign Exchange Analytics, Essex, Conn.
"People have been waiting for the U.S. economy to slow for some time," Solin said. "Now that the signs of slowing are apparent, they have become the main driver behind the euro's recovery."
The euro soared to a high of 95.05 U.S. cents Friday after the jobs data were released, posting a gain of 7 percent from its record low of 88.49 cents on May 4.
 "The euro zone economy is strong," Solin said. "The latest German purchasing managers' survey was at a record high."
Although stocks soared Friday on hopes that the slowing economy would keep the Fed at bay, the dollar plunged on fears that its interest rate support would be removed. Analysts said this again demonstrated that there is no longer a link in movements of stocks and the dollar.
"The euro's fundamentals are solid," said Chandler of Mellon Financial. "The one piece missing from the puzzle for the euro was a weakening in the U.S. economy, and that piece has now fallen into place."
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Bob Lynch, currency strategist at Paribas in New York, said the weaker U.S. economic data "have taken the edge off the dollar and pulled it down from its recent highs."
It is still too early to conclude, however, that the euro has made a definitive turn higher, Lynch said.
"Fundamental developments in the past didn't help the euro," he noted. "The jury is still out on whether the U.S. economy will have a soft landing, no landing at all, or a hard landing."
Nonetheless, the euro zone is in a better position in the economic cycle, and is experiencing an upswing, not a peak or a downturn, Lynch said.
More Fed interest rate hikes are possible
Some analysts cautioned that there is still a good chance that the Fed could raise rates on June 28, despite the celebrating on Wall Street, which will only increase that likelihood. The Fed remains concerned about the "wealth effect" of rising stock prices, which could stimulate consumer spending and further strain the economy's limited resources.
"A rate hike is not by any means off the table," said Solin of Foreign Exchange Analytics. "The Fed may decide to make an insurance move of one-quarter point in June."
While there has been some easing of labor market pressures, the other issue of concern to the Fed is the demand side of the economy, he said. "Demand is still too hot," Solin said, adding that the market will now focus on retail sales to see if there is any cooling.
"The Fed may still have work to do," said Chandler of Mellon Financial. "The slowdown is for real, but it is from a very high level. We need to see growth cut in half for it to be more in line with the Fed's liking." Chandler said the markets are anxiously anticipating the release on Friday of the U.S. producer price index for May. "It will be hard to duplicate the performance of the index in April, when the headline number was down 0.4 point and the core rate was up 0.1 point," he said.
A flare-up in the PPI would put Fed-tightening expectations back on the front burner, analysts said.
The weak U.S. jobs report helped pull the Japanese yen out of its recent slump. The yen rebounded to 108 to the dollar, after being pummeled earlier on news of the collapse of Daihyaku Mutual Life Insurance Co.
"The situation for Japan's life insurers raised concerns about the financial sector in general, as well as the implications it could have for the Japanese economy," Lynch said.
Japan is expected to report its first-quarter gross domestic product on Friday. "If the report is respectable, concerns about the Japanese economy may subside," Lynch said. 
--Gordon Platt is a freelance columnist writing about currency markets for CNNfn.com
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