Dollar drops across the board on weak US jobs data

San Francisco (Jan 12)  The dollar slumped on Friday, hitting a one-week low against a basket of other currencies, after a surprisingly weak US jobs report spurred in a rally in bonds. US employers hired the fewest workers in almost three years in December, though the setback was likely to be temporary amid signs that cold weather conditions might have had an impact.

Still, the jobs data resulted in a rally in the bond market, pushing benchmark yields lower. Currencies often shift based on the difference between countries' interest-rate levels, so lower yields makes the US dollar somewhat less attractive. The dollar index, which measures the dollar against six major currencies, fell to 80.533, a one-week low. It was last at 80.633, down 0.46 percent.

Against the yen, the dollar hit a two-week low of 103.82 yen, last trading down 0.72 percent at 104.07 yen. "The economists have looked at the numbers and have kind of downplayed some of this weakness, but the markets were taken by surprise," said Vassili Serebriakov, currency strategist at BNP Paribas in New York.

"I think we're still driven by the reactions in the rates market. You look at the trajectory in the front-end rates, and we're sitting at the lows of the day. The same goes for the 10 year," he said. US Treasury yields, which move inversely to the price of the bonds, fell while stocks pared earlier losses.

Currency speculators, however, boosted bets in favour of the US dollar in the latest week to their largest in four months at $21.11 billion, according to data from the Commodity Futures Trading Commission released on Friday. That optimism on the dollar could change next week given Friday's weak US payrolls number. Nonfarm payrolls rose only 74,000 last month, the smallest increase since January 2011, and the unemployment rate fell 0.3 percentage point to 6.7 percent, in part due to people leaving the labour force.

"It was clearly a disappointing number and the markets are reflecting that disappointment by selling the dollar across the board," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "I do not think it alters the outlook for steady reductions in Fed stimulus. Certainly it will temper any talk of more accelerated pace of Fed policy reduction." The Fed announced in December that it would trim its monthly purchases of Treasuries and mortgage-backed securities to $75 billion from $85 billion, and many economists expect it to decide on a similar-sized cut at its next meeting on January 28-29.

St. Louis Fed President James Bullard said on Friday he is "disinclined" to focus on December's job data alone when considering whether the central bank should continue to trim bond purchases. One bright spot for the US dollar was its performance against the Canadian dollar, continuing its week-long climb. Data out of Canada on Friday showed a surprise setback for the job market in December, capping the worst year for hiring since 2009.

The dollar hit a high of C$1.0944, not seen since early October 2009. The greenback was last trading up 0.54 percent at C$1.0896. Meanwhile, demand for euro zone peripheral government bonds saw the single currency jump to its highest point against the dollar in a little more than a week, hitting a high of $1.3687. The euro was last trading at $1.3666, up 0.44 percent.

A key theme at the start of 2014 is the divergence of outlooks on monetary policy, something that has benefited both the pound and the dollar, at the expense of the euro. European Central Bank President Mario Draghi added to pressure on the euro on Thursday by firming up the bank's promise to take more action to lower market borrowing costs if need be. But while the euro zone economy still looks fragile, government finances and banking in the bloc broadly look far healthier than six months ago, and players are starting to trade heavily on improvement in its debt-laden southern half.