Robust U.S. jobs data spurred investors to buy the U.S. dollar and sell the Japanese yen on Friday with the rosier economic report curtailing some expectations the U.S. Federal Reserve will hold off on raising interest rates until 2014.
The strong jobs data diminished the greenback's safe-haven status as investors took on more risk. The main beneficiary was the euro where initial losses on the report were erased by the end of trade despite the overhang of Europe's sovereign-debt crisis.
Data from the U.S. Labor Department showed 243,000 nonfarm jobs were created in January, its fastest pace in nine months, pushing the unemployment rate to an unexpected three-year low of 8.3 percent.
Friday's data erodes the argument for more economic stimulus by the Federal Reserve and for some investors even suggested the central bank could raise interest rates sooner than the 2014 time period suggested in recent days.
You get a couple of payrolls like this and [a rate increase] is back to mid-2013, and that puts you inside the two-year window where it will get priced in by the FX markets, said Greg Anderson, G-10 strategist at CitiFX, a division of Citigroup in New York.
A separate report showing greater-than-expected expansion in the U.S. services sector in January only added to the dollar's allure.
Interest-rate futures contracts expiring in April 2014 suggested a 36 percent chance of a rate hike by then, after signaling no chance before the report. Most traders saw June as the most likely month for a first rate hike. Before the report, traders saw the first hike as most likely in August 2014.
While the dollar maintained its advantage against the yen and Swiss franc, the euro clawed back to the break-even point by the end of the day on greater risk tolerance, illustrated by a rally in stocks and a plunge in U.S. Treasury prices.
The euro traded unchanged at $1.3145 late in the New York session on Friday, having dropped as low as $1.3065 in the initial sell-off on the strong jobs report.
Against the yen, the dollar rose 0.50 percent to 76.56, off of Thursday's three-month low of 76.02 and also away from levels where Japanese officials have threatened intervention to weaken their currency and ease the pressure on its key export sector. The high on Friday of 76.22 marked a one-week peak, although the dollar is still near the all-time low of 75.311 hit on Oct. 31.
Japanese Finance Minister Jun Azumi said on Friday that speculative yen buying had gathered pace since last week and repeated that he was ready to act decisively to counter one-sided moves.
However, the unresolved Greek debt restructuring left the region's currency at a deficit against the so-called commodity currencies, which benefit from stronger economic growth.
Look at the euro/Aussie cross. There is no comeback there. That is what I would isolate. It is a good reflection of, well, yes, the euro came back because the risk-on trade extended a little further [against the U.S. dollar] but not against Australia or Canada or New Zealand, said Anderson.
The Australian dollar climbed to a six-month high of US$1.0794 in the New York session, and it was last up 0.59 percent at US$1.7074. The euro fell to a fresh all-time low against the Australian dollar around A$1.2162, according to Reuters data.
Investors are still awaiting the outcome of talks between Greece and its private creditors on a debt swap. Greek officials have said repeatedly that a deal is near, and European Union Economic and Monetary Affairs Commissioner Olli Rehn reiterated on Thursday that it could be reached by the end of the week.
In the very short term, people will be reluctant to take positions in the euro as there is a lot of announcement risk surrounding Greece, said Daragh Maher, currency strategist at HSBC in London.
The euro hit a six-week high in the last week, stalling ahead of resistance at $1.3235, the 38.2 percent retracement of the euro's fall from October to January, using Reuters data.
Against the Swiss franc, the euro was up 0.23 percent at 1.2075 francs, close to the 1.2000 level the Swiss National Bank has said it would defend at all costs.
Top Swiss politicians on Friday spoke out in favor of the central bank's cap of 1.20 per euro on the Swiss franc, saying it was the bare minimum needed to cushion the economy.