Currencies: Euro shoots above $1.11 after employment-cost index

The euro soared above $ 1.11 Friday, reversing three sessions of declines, after the employment-cost index showed wage inflation in the second quarter was much lower than previous data suggested.

After a 0.7% increase in the first quarter, the index increased by only 0.2% in the second, its weakest gain since 1982. Economists surveyed by MarketWatch were expecting a 0.6% gain.

The index doesn’t normally elicit such an intense market reaction, said Steven Barrow, head of G-10 strategy at Standard Bank. But the weak report, considered alongside Thursday’s less-than-spectacular gross-domestic-product data, has shifted investors’ expectations on the timing of the Fed’s impending interest rate hike — what would be the first hike since 2006 — back to the central bank’s December policy meeting.

The Labor Department’s nonfarm payrolls reports from recent months had suggested that wage inflation was relatively consistent, Barrow said.

“A few things have added up this week to reduce our confidence about the Fed,” Barrow said. “In terms of the September liftoff, I think the Fed statement didn’t actually help that.”

The euro EURUSD, +1.2989%  recently trimmed its gains slightly to trade around $ 1.1092, compared with $ 1.0938 late Thursday in New York. The dollar USDJPY, -0.32% weakened to at ¥123.58, from ¥124.13 late Thursday in New York.

The ICE U.S. Dollar Index DXY, -0.91% a measure of the buck’s strength against a basket of six rival currencies, was down more than 1% on the day to 96.5110.

Fed policy makers modified their view on the U.S. labor market in Wednesday’s policy statement, inserting the word “some” into a line saying they need to see “further improvement” in the labor market.

This suggested that policy makers only needed to see minimal improvement in the job market to justify a rate hike.

But according to the ECI report released Friday, “we haven’t seen an improvement. We went backwards,” Barrow said.

Friday’s decline puts the dollar on track to record a weekly loss against the euro, but the buck remains on track to finish July higher vs. the shared currency. – Top Stories

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