The dollar fell against the yen on Friday, marking its steepest one-day drop in over a year, pushed lower by surprisingly weak jobs data and speculation that China may soon allow its currency to appreciate against the dollar.
If China does allow the yuan to trade in a wider band, other Asian currencies are also likely to rise against the greenback due to their economies' close ties with China.
The dollar dropped broadly after government data showed the US economy generated only 96,000 new jobs in September, well short of market expectations of 148,000.
The data stoked market concerns the Federal Reserve may pause in hiking interest rates, which weakened the currency, since higher rates bolster the appeal of short-term dollar-denominated assets.
"It looked like everyone was positioned for a stronger number going in. That's all reversed," said Jason Daw, senior G10 foreign exchange strategist with Merrill Lynch in New York. "The dollar is pretty much tanking."
"For the Fed, I think our view has been for a while that the next move will be the last one (for some time)," and that once the fed funds rate rises to 2 percent it will remain at that level until the end of 2005, he said. The benchmark federal funds rate now stands at 1.75 percent.
Before the jobs report, the dollar had already been under pressure after Fed governor Ben Bernanke said on Thursday the US central bank could temporarily halt its cycle of rate increases if the economy slowed.
After the release of the jobs report, the dollar dropped to a session low against the Japanese currency of 109.33 yen according to Reuters data, down around 1.6 percent on the day. In late Friday trading, the dollar edged back to 109.46 yen.
The euro earlier rocketed against the dollar, trading at a one-week high of $1.2433, up more than 1 percent on the day, but was at $1.2410 in late New York trading.
Against the Swiss franc, the dollar fell to a session low of 1.2471 francs but was later at 1.2495 francs, down 1.1 percent. Sterling was trading at $1.7938, up 0.6 percent.
Minneapolis Federal Reserve President Gary Stern later assuaged some market concerns that the latest jobs data would cause the central bank to pause in raising rates.
"I don't find it inconsistent with the path we are on. We have said we are going to remove the degree of accommodation at a measured pace, and what we have been seeing, in my mind, doesn't change that," Stern told Reuters in an interview when asked about the soft labor market.
The jobs report, regarded as a pivotal reading of the economy, was the last such release before the November 2 US presidential election. The data showed that 585,000 jobs have been lost since US President George W. Bush took office in January 2001, including upward revisions of data.
"You would have to be a politician on the campaign trail to spin it as good news. The report does seem to indicate that the soft patch of economic data continues," said Sean Callow, currency strategist with research firm IDEAglobal in New York.
The US Department of Labor said last month's barrage of hurricanes in the Southeast had no material impact on the September payrolls report.
The dollar had begun losing ground against the yen overnight, after news that President Bush had spoken to Chinese President Hu Jintao on currency issues rekindled speculation of an imminent upward revaluation of the Chinese yuan.
Traders said the euro, after breaching $1.2400, still has to trip a lot of stop-loss orders if it is to rise beyond key levels. A stop-loss order is an order to sell a currency below market prices when it reaches a certain level.
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