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Dollar surges to 5-month highs vs yen

NEW YORK: The dollar, buoyed by a government report showing labour costs fell despite a tight job market, powered to five-month highs against the yen on Tuesday and countered a rally attempt by the euro.

The U.S. currency spurted higher after the U.S. Labour Department reported nonfarm productivity jumped a stronger-than-expected 5.0 percent in the fourth quarter, and unit labour costs surprised with a 1.0 percent drop.

The data also triggered a rally in inflation-wary U.S. stock and bond markets, helping to prop up the greenback.

"In the grand scheme of things this is a second-tier report but it is a very dollar-friendly number," said Jim McCormick, currency strategist at J.P. Morgan.

Analysts polled by Reuters had been expecting productivity to rise by 4.2 percent and the cost of labour to climb by 0.8 percent.

The dollar, which had hit its highest level since September against the yen JPY overnight before succumbing to selling pressure, built up a second head of steam after the data and pressed to a fresh high of 109.69 yen.

But it met stiff resistance around the psychologically significant 110-yen level, traders said and closed just under 109.50, a gain of 0.75 percent on the day.

"At every layer from this point on, the market expects it to be very tough to break the upside," said Jeffrey Yu, senior dealer at Sanwa Bank in New York. "Despite all this, there are buyers waiting in the wings to buy dollar/yen."

The yen has been under pressure since Japanese officials said at the weekend that gross domestic product (GDP) probably contracted for the second quarter in a row -- a technical recession -- in the final quarter of 1999.

Against the euroEUR, the dollar ended softer compared to its Monday New York close after ceding ground during European trade. But the productivity data helped the U.S. currency claw back much of the territory it had lost.

The euro had climbed more than a cent against the dollar as Germany's blue-chip DAX stock index rallied more than 3 percent and German unemployment fell for the fourth straight month.

Data released by Germany's Federal Labour Office showed unemployment fell to 3.959 million in January, adjusted for seasonal factors, giving a jobless rate of 10.1 percent.

But rather than extend gains in U.S. trade, the euro instead was knocked back from an intraday high of 99.13 cents to around 98.50 at the U.S. close, compared to its 98.08-cent New York Monday finish.

The market failed to respond to comments from European Central Bank chief economist Otmar Issing, who repeated he believed the euro would rise as growth in the 11-nation euro zone started to outpace that of the United States.

Asked whether the ECB could intervene in the currency markets to defend the euro, Issing said: "It's a question of the right moment, the right occasion, the right timing, the right situation and the conviction that it will work."

But he added that those conditions had not been fulfilled.

Many analysts said the U.S. productivity report justified the Federal Reserve's cautious approach to hiking interest rates to engineer a soft landing for a booming economy.

"Until you start to see signs of imbalances in the U.S. that have an impact on the inflation and Fed story, it is going to be a slow and gradual recovery in the euro," McCormick said.

The Fed has hiked rates four times in the past six months and has hinted it may tighten more. But the Fed's moves have been gradual, by a quarter percentage point each time.-Reuters