Fireworks for the dollar

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6 months of job losses

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NEW YORK (CNNMoney.com) -- It's appropriate, as we head into a long holiday weekend to celebrate America's independence, that the dollar rallied a bit Thursday.

One reason for the slight bounce in the greenback was that the employment report for June was not as bad as some feared it would be. While it's certainly hard to celebrate a loss of 62,000 jobs in the month, the numbers were roughly in line with economists' forecasts.

And the European Central Bank, as expected, raised a key interest rate by a quarter-percentage point Thursday morning. That alone would be bad for the dollar, making the euro more attractive to investors. But ECB president Jean-Claude Trichet, speaking in a press conference following the rate announcement, did not sound overly hawkish on inflation, suggesting he may be done raising rates.

A weak dollar has been mentioned as one of the key culprits behind the dramatic spike in commodity prices, particularly oil. That's because the price of crude and other commodities are denominated in dollars. So as the dollar slid against the euro, that fueled more inflation pressures.

Oil prices hit a new trading high earlier this morning but pulled back a bit following the ECB decision and release of the employment report.

This is probably causing Fed chairman Ben Bernanke and the rest of the central bank's policymakers to breathe a small sigh of relief this morning.

The jobs figures, while bad, were not gloomy enough to give the Fed any reason to lower interest rates again - a move that would be disastrous for the dollar.

"We are in a situation where all the world's central banks are on yellow, if not red, alert in terms of inflation and oil prices," said Oscar Gonzalez, economist with John Hancock Financial Services in Boston. "The Fed is in a difficult position because of the weaker dollar and the potential for more inflation."

But the lack of a strong signal about future rate hikes from the ECB could keep a lid on further oil price spikes. What's more, Trichet indicated that " downside risks prevail" in the Europe.

That's an acknowledgement that the ECB could be be forced to lower rates if European economies start to tail off. That could also lead to a stronger dollar and lower oil prices.

"Eventually, there will be enough of an economic downturn in European countries and that choking off the economy there will have an impact on oil prices," said Michael Strauss, chief economist with Commonfund, a money management firm based in Wilton, Conn.

Still, there are plenty of reasons for those worried about the future of the dollar, financial markets and economy to cry in their beers at their Fourth of July barbecues.

Concerns about rising tension between Israel and Iran are likely to keep oil prices from falling sharply anytime soon, regardless of what happens with the dollar.

A report about the services sector from the Institute of Supply Management released Thursday morning showed that activity in the services sector shrunk in June.

And even though the June labor numbers didn't live up to the most bearish fears, another jobs report released Thursday morning shows that there is still a lot of pain in the labor market. Weekly jobless claims rose above 400,000 for the first time since the end of March.

Gonzalez says that while the tax rebate checks could help the economy in the next few months, their impact will be short-term.

"The fourth quarter looks dismal. The rebates will be gone and the economy looks pretty vulnerable at that point," he said.

But both Gonzalez and Strauss said that one bright spot from the weak economic numbers is that there appears to be no classic signs of inflation. Typically, rising wages are the biggest contributor to pricing pressures.

So if the dollar holds steady or even strengthens further and if oil prices finally begin to come back to Earth, the Fed may be able to sit tight for the foreseeable future and let the seven rate cuts since last September work their magic.

"Higher prices and weaker economic activity around the world are lowering demand for oil. At some point, supply and demand matters and oil prices should come down," Strauss said "And labor inflation in the U.S. is modest. The Fed can buy some time and it may stay on hold for awhile."

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