US jobs surge puts fight back in dollar

BY RUPERT CORNWELL

AND PETER RODGERS

The dollar ended a week of turmoil on the foreign exchange markets with gains against the pound and the mark because of an unexpectedly buoyant US employment market in February and progress in resolving Mexico's financial crisis.

The employment figures prompted suggestions of a rise in US interest rates. Sterling fell 3.8 cents to $1.58 and was down 1.4 pfennigs to DM2.23 against the mark, in both cases back to around levels at the beginning of the week.

But the interest rate fears did not spill over into London, where dealers said the pound's gyrations were well within the range seen this week, and did not signal anything new for British interest rates, which were unchanged on the futures market.

The employment figures gave the US Federal Reserve ample excuse to lift interest rates, and Mexico's economic austerity package, which by pushing the peso higher removed more of the pressure from the dollar

After a recent host of indicators suggesting the recovery was running out of steam and that further rate increases by the Fed were unlikely, the figures, showing a drop in the total of jobless to a four-year low of 5.4 per cent, astonished analysts. The 318,000 new non-farm jobs the economy created during February were also far more than the markets expected.

By mid-session, stocks on Wall Street had risen sharply on the prospect of continuing healthy growth of both the economy and corporate earnings, with the Dow Jones average up more than 47 points to 4,030.77, well above its previous record close of nearly 4,012. After an early decline, the benchmark 30-year bond also moved higher, as the dollar gained against the mark and the yen.

For proponents and foes alike of higher interest rates, the unemployment figures provided ammunition aplenty. The fresh evidence of continuing growth gives the Fed ample reason, if it chooses, to push up short-term rates later this month, with little risk of triggering a recession.

Alan Greenspan, the Fed chairman, hinted as much this week. Higher rates in turn would make dollar-denominated assets more attractive. "This is restoring confidence in the dollar," said Mr Hugh Johnson, market economist at First Albany Corp. But sceptics that the Fed will see fit to boost rates for the eighth time pointed to the unchanged hourly earnings, coupled with a slight fall in the average working week to 34.5 hours.

This, they maintain, is proof that inflation is still under control, despite the surge in overall employment. Of the 318,000 new jobs, 191,000 were in service industries.

But whatever happens to rates, the figures were good enough for President Clinton - whose 1996 re-election hopes are largely tied to continuing strength in the economy - to make an unscheduled appearance in the White House press room to talk up the economy, and proclaim that, under his stewardship, "the fundamentals are healthier than they have been in a generation". A sustained recovery is essential if he is to be re-elected in 1996.

Also underpinning the dollar was the announcement at last of Mexico's stabilisation measures, which by mid-session had helped the peso to 6.70 to the dollar.

The 318,000-jobs gain was the best monthly showing since a 534,000 jump last November.