By James Ramage
The dollar pushed to an 11-year high against the euro on Friday
after a strong U.S. jobs report solidified market expectations for
the Federal Reserve to raise interest rates around midyear.
The euro fell to $1.0839 in late-afternoon trade in New York,
its lowest level against the dollar since Sept. 4, 2003. The euro
recovered slightly to close the session down 1.7% at $1.0846 in its
largest one-day decline in six weeks.
The U.S. economy added 295,000 jobs and the unemployment rate
ticked down to 5.5% in February, according to the Labor Department.
Economists had predicted 240,000 jobs were created last month and
the unemployment rate would fall to 5.6%.
The robust U.S. employment numbers stood as the latest blow to
the euro this year, which is approaching parity with the dollar.
Anemic growth and inflation have plagued the eurozone for more than
a year, prompting the European Central Bank to take stimulus
actions that also weaken the currency. In addition, tensions with
Greece and a conflict bubbling between Ukraine and Russia have
frightened investors away from eurozone assets periodically.
Meanwhile, U.S. data have shown improvement, particularly those
for employment, which has encouraged investors to pour into
dollar-denominated assets to benefit from stronger economic growth
and the potential for higher interest rates. The Federal Reserve
has said it would consider raising interest rates when the economy
shows it has recovered sufficiently from the financial crisis.
Recent eurozone numbers have improved slightly but not enough
for many investors. Negative interest rates, stubbornly high
unemployment and the launch of the ECB's quantitative-easing
program should keep steady downward pressure on euro against the
dollar, said Scott Mather, chief investment officer of U.S. core
strategy and portfolio manager of the Total Return Fund at Pacific
Investment Management Co., which manages $1.68 trillion.
The ECB has cut interest rates, pushing its deposit rate to a
minus 0.2% in an effort to stimulate growth. On Monday, the central
bank will begin a EUR60 billion-a-month asset-purchase program that
involves printing euros to buy bonds, which is expected to weaken
the currency further.
The euro could slide by as much as 10% over 2015, "so parity
with the dollar is certainly possible within the next few
quarters," Mr. Mather said. And from the U.S. side of the equation,
"the jobs report should further strengthen the dollar broadly, and
against the euro in particular."
Some investors, though, predict the euro's fall will be more
measured, as it has weakened significantly already, and the economy
has started to show signs of life. The eurozone saw retail-sales
gains in January, signaling that falling oil prices are fattening
consumers' wallets, while Germany's industrial production in rose
that month, sparking the currency bloc's biggest engine.
On Thursday, ECB President Mario Draghi raised growth and
inflation forecasts for the region's economy.
"The easy money's already been made" in the weaker-euro trade,
said Steve Lee, portfolio manager within fixed income at Nuveen
Asset Management, which oversees more than $130 billion. "We think
the eurozone economy will continue to improve."
Nuveen recently trimmed its bearish euro bets, although it
expects the euro to weaken further against the dollar and the U.S.
economy to outperform the eurozone's.
Still, the weaker euro is likely to benefit exporters and
attract tourists, both of which could give the eurozone's economy a
much-needed lift. Economists are hopeful that increased bank
lending that comes with negative rates could boost investment.
Looking ahead, the dollar stands to gain in mid-February, when
the Federal Reserve's policy-making committee meets. Investors and
analysts predict that the February jobs data will persuade the Fed
to drop "patient" from the meeting's statement. Doing so would
signal that the Fed could raise rates as soon as this summer.
"The big picture is one of an improving U.S. job market. That's
going to make it harder on the Fed to say no to a rate hike as
early as June," said Joe Manimbo, senior market analyst at Western
Union.
Fed funds futures, which investors use to bet on central-bank
policy, showed Friday that investors and traders see a 46%
likelihood of a rate increase in July, according to data from CME
Group Inc. That compares with a 37% probability a day earlier.
In other trade, the dollar rose 0.5% against the yen, to 120.74
yen, the highest since Jan. 2.
Write to James Ramage at james.ramage@wsj.com