Oil surges and dollar slides on US jobs data (FT and AP report)

By Michael Mackenzie in New York, James Politi in Washington and Chris Flood in London

Published: June 6 2008 18:58 | Last updated: June 6 2008 18:58

Oil prices soared to a record high and the dollar slumped on Friday as the largest one-month rise in the US unemployment rate for 22 years tempered expectations of US interest rate rises later this year.

(Stocks fall sharply on surge in oil, jobs data
Friday June 6, 2:51 pm ET
By Tim Paradis, AP Business Writer

Stocks tumble after surge in oil prices, suprise jump in unemployment; Dow falls over 300 NEW YORK (AP) -- Wall Street plunged Friday on two troubling economic developments: oil prices that surged more than $10 a barrel to a fresh record and a jump in unemployment that was much larger than the market anticipated. The Dow Jones industrial average fell more than 300 points.

Crude oil has seen a huge rebound this week after falling amid a drop in demand for gasoline. The jump continued Friday; light, sweet crude set a high of $139.01 before edging down to trade up $10.47 at $138.26 a barrel on the New York Mercantile Exchange. The surge followed a Morgan Stanley shipping analyst's prediction that would reach $150 a barrel by July 4, a decline in the dollar and fresh tensions in the Middle East.)

The dollar had stabilised recently as markets priced in a US rate hike by year’s end, but the May employment report forced investors to rethink their positions. This sparked a fall in the dollar and a dramatic surge in dollar-denominated commodities such as oil and gold.

Stocks fell sharply in Europe and the US as investors worried about a vicious cycle in which dollar weakness fuels higher oil prices, and rising energy costs further slow economic growth.

Alan Ruskin, strategist at RBS Greenwich Capital, said: “Dollar weakness and the rise in oil prices is very negative for the US and global economy. High oil prices are affecting parts of the world, such as Asia, that the credit crunch could not reach.”

Crude futures rose nearly $8 to hit $135.60 a barrel, after a gain of $5.49 on Thursday. The euro rose 0.9 per cent to $1.5731. The S&P 500 was down 1.7 per cent in afternoon trading after the FTSE Eurofirst 300 fell 2 per cent.

The US unemployment rate hit 5.5 per cent in May, up from 5 per cent in April as the economy lost 49,000 jobs. It was the largest monthly change since February 1986 when the rate also rose half a percentage point.

“I’ve been convinced that the unemployment rate was headed toward 6 per cent but I didn’t expect to get half way there in one day,” said Jay Mueller, economist at Wells Fargo. “The Fed does not tighten when the unemployment rate is rising. A 2 per cent Fed Funds rate may prevail for quite some time.”

The employment report was the second blow for the dollar this week. On Thursday, the European Central Bank strongly indicated it would raise rates this summer owing to inflation worries, triggering fresh dollar selling and higher oil prices.

The dollar had rallied this week when Ben Bernanke, chairman of the Federal Reserve, expressed concern about the dollar feeding higher import prices and consumer inflation.

Economists blamed part of the jump in US unemployment on high-school and university students looking for summer jobs, but it was still higher than expectations of a rise to 5.1 per cent.

Although the decline in jobs last month was slightly better than the 60,000 job losses predicted by economists, the data for previous months was revised lower by 15,000 jobs.

Copyright The Financial Times Limited 2008