The dollar rose on Monday after losses the previous session, as investors trimmed bets against the currency given persistent U.S. inflation pressures that may prevent the Federal Reserve from cutting interest rates aggressively.
The dollar's recovery was mirrored in a rebound in European equities and U.S. stock futures, and a drift lower in safe-haven government bonds. These are all reversals of moves on Friday prompted by the latest U.S. employment report, which showed a meager 18,000 jobs created in December and a jump in the unemployment rate to 5 percent.
The jobs data fueled expectations the Fed will cut rates by 50 basis points at the end of the month to 3.75 percent rather than a cut of just 25 basis points, on the way down to 3 percent by the end of the year.
But on Monday investors seemed to be taking a slightly less gloomy view, with some betting inflation concerns may prevent the Fed from cutting rates too fast, and others speculating the U.S. administration could use a range of measures, possibly including tax cuts, to help stave off a recession.
What we're seeing is a little position-squaring and a little profit-taking after Friday's sharp losses. It's still too early to say a 50 basis point rate cut is a forgone conclusion by the Fed later this month, said Omer Esiner, market analyst at Ruesch International in Washington.
When you look at the big picture, inflation is still a big concern. We've seen that in recent U.S. data including $100 oil, he added.
In early New York Trading, the dollar index was up 0.2 percent on the day at 75.999 after falling as low as 75.429 on Friday.
The dollar rose 0.5 percent to 109.04 yen, with the Japanese currency broadly weaker amid a rise in European equity markets.
The euro was down 0.1 percent at $1.4723, while the pound recovered from 4-1/2-month lows of $1.9654 to trade slightly up on the day at $1.9729, thanks to a 0.2 percent fall in the euro versus sterling at 74.62 pence.
BOE, ECB MEET THIS WEEK
The market may have got a little bit carried away on Friday post-payrolls, which clearly weren't positive, but they weren't quite as negative as perhaps the market reacted...And we've got stocks attempting a tentative bounce, said Jeremy Stretch, strategist at Rabobank.
A combination of all that at least at the moment is providing a bit of dollar support.
There was also some caution against selling the dollar too far ahead of a speech by Fed Chairman Ben Bernanke on Thursday and central bank meetings later this week.
The European Central Bank and Bank of England are both expected to keep interest rates on hold on Thursday at 4 percent and 5.5 percent, respectively, although the BOE decision will be an extremely close call.
UK rates futures are attaching around a 45 percent chance the central bank will cut rates 25 basis points, which would likely weigh on sterling.
U.S. Treasury Secretary Henry Paulson will speak later on Monday.
(Additional reporting by Jamie McGeever in London; Editing by Andrea Ricci)