The dollar jumped against major currencies on Friday after data showed the United States lost far fewer jobs than expected last month, bolstering hopes the economy is on a stable path to recovery.
Employers cut 11,000 non-farm jobs last month while markets had expected job losses of 130,000. The surprisingly strong report stoked speculation the Federal Reserve may consider raising interest rates from record lows sooner than initially thought.
That would increase returns on dollar-denominated assets and make them more attractive again to investors.
The market is pricing in more scope for changes in Fed policy, meaning, higher interest rates. That's why we're seeing a rally in the dollar, said Paresh Upadhyaya, senior portfolio manager at Putnam Investments in Boston. Upadhyaya helps oversee assets of about $20 billion.
But I wouldn't put too much into this dollar rally. First of all, it's a Friday and its December, so there's usually very poor liquidity. If anything, this is a technical washout, Upadhyaya said.
The dollar broke above 90 yen for the first time in three weeks and was on track for its best day against the Japanese currency since August. It was last up 2.5 percent at 90.46 yen.
The euro, meanwhile, fell below $1.49 and headed for its biggest one-day decline since June. By early afternoon trading, the euro was down 1.5 percent at $1.4840, well off a $1.5091 peak.
The ICE Futures' dollar index <.DXY>, a measure of its value versus six currencies, gained 1.6 percent to 75.85, its biggest one-day jump since October of last year.
The dollar index has lost 7 percent so far this year as markets have bet that the United States would lag recovery in the rest of the world, and the Fed would keep interest rates low indefinitely.
A jobs recovery is the last piece of the puzzle before we can say we're in full recovery, so it raises the question that maybe rates will go up sooner rather than later. That's pushed the dollar higher, said Fabian Eliasson, vice president of FX sales at Mizuho Corporate Bank in New York.
The dollar rose 1.7 percent to 1.0175 Swiss francs after earlier falling below parity, while sterling fell 0.5 percent to $1.6470.
Recent Fed statements about keeping U.S. rates low for an extended period have encouraged investors to use the dollar as a funding vehicle to purchase higher-yield assets.
But analysts said the data today forced many traders to cover short-dollar positions and may signal the end of trades that blindly sell the dollar on strong economic news.
If (signs of a job recovery) continue, you may start to see the dollar rally on strong data rather than the opposite, Mizuho's Eliasson said.
(Additional reporting by Steven C. Johnson; Editing by Padraic Cassidy)