The U.S. dollar got a boost on Friday from data showing strong growth in the U.S. labour market and the lowest jobless rate in almost three years, but oil prices teetered and stocks fell as the upbeat figures failed to enthuse investors.
The U.S. Labour Department reported the unemployment rate fell to 8.5 percent in December, from a revised 8.7 percent in November, offering the strongest evidence yet of an accelerating U.S. economy.
The euro hit an almost 16-month low against the dollar as the data underscored the increasingly divergent fortunes of the U.S. and European economies.
Strong economic data in the past has helped the euro as investors became more tolerant of risk, but investors are now being driven more by evidence that the U.S. economy is strengthening while Europe appears headed toward recession.
We'd gone a long time where good data was, paradoxically, not good for the dollar, said Robert Sinche, global head of currency strategy at RBS in Stamford Connecticut. It looks like we may be turning the corner on that.
Still, U.S. stocks fell and U.S. Treasuries erased early losses to turn higher as remarks from top Federal Reserve officials calling for more monetary stimulus fuelled safe-haven bids for government debt.
Crude oil futures also pared early gains and wavered as the dollar gained.
The U.S. unemployment data was not a total surprise after a strong private payrolls report on Wednesday, said Michael Marrale, a managing director at RBC Capital Markets in New York.
The number was actually good, but it hit the whisper, Marrale said, referring to numbers traders banter about before data is released. So, it's in line with what people were expecting.
The Dow Jones industrial average <.DJI> closed down 55.78 points, or 0.45 percent, at 12,359.92. The Standard & Poor's 500 Index <.SPX> fell 3.25 points, or 0.25 percent, at 1,277.81. The Nasdaq Composite Index <.IXIC> slid 4.36 points, or 0.16 percent, at 2,674.22.
Equities in Europe ended little changed, with many investors happy to cash in on three weeks of gains ahead of the start of the U.S. fourth-quarter earnings season on Monday.
The FTSEurofirst 300 index <.FTEU3> of European shares ended the day up 0.03 percent at 1,013.73 points, a 1.2 percent gain on the week.
The dollar got a big boost against the euro and the yen on the employment data.
The U.S. Dollar Index <.DXY> was up 0.40 percent at 81.258, while the euro was down 0.48 percent at $1.2719.
Euro zone retail sales fell and economic sentiment soured at the end of 2011, pointing to recession. Retail sales for the bloc fell a worse-than-expected 0.8 percent in November from October, the European Union's statistics office reported.
The market is seen staying on edge and the euro under pressure ahead of Italian and Spanish government bond sales next week, viewed as the year's first big fundraising tests for struggling euro zone countries.
Several top Fed officials on Friday called for more stimulus to help the housing sector, whose struggle has been a drag on the U.S. economy and the banking system.
The 30-year bond price gained 30/32, pushing its yield down to 3.02 percent. Benchmark 10-year notes rose 10/32, driving their yields back below 2 percent to 1.96 percent.
Analysts expect solid bidding at the U.S. Treasury's upcoming debt auctions, starting with a $32 billion sale of new three-year notes on Tuesday.
Treasuries being a U.S. dollar-denominated asset is where investors want to be, said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York.
The strong dollar weakened the price of crude futures and countered lingering concern over a possible oil supply disruption due to tension between Iran and the West.
Crude was still on course to rise more than 4 percent in the first week of 2012 after Iran threatened to shut the Strait of Hormuz, a potential chokepoint on the world's most important oil route, in retaliation for tighter U.S. sanctions and a possible ban on its crude exports to Europe. The sanctions are aimed at discouraging Iran's nuclear program.
Brent crude futures settled up 32 cents at $113.06 a barrel. U.S. light sweet crude oil settled down 25 cents at $101.56 per barrel.
Gold eased, snapping a five-session winning streak, but trade was choppy as investors digested the U.S. jobs report.
U.S. gold for February delivery settled down $3.30 at $1,616.80.
(Editing by Leslie Adler and James Dalgleish)