The dollar extended gains on Monday after data late last week showing surprisingly big US job growth eased worries about the economy and fuelled expectations the Federal Reserve would keep raising interest rates. Helping support the dollar as well was China's silence over the weekend on the yuan's tight peg, dampening speculation among some traders that Beijing might soon revalue its fixed currency. The hefty 274,000 increase in US non-farm jobs in April eased concerns an economic slowdown would prompt the Fed to pause its monetary tightening campaign and highlighted the relative weakness of other major economies, traders said.
"If you compare the US, Japanese and European economies, it looks like Europe is the worst off," said Katsunori Kitakura, manager of the treasury department at Chuo Mitsui Trust and Banking. "I expect the dollar to remain supported."
Still, the lure of rising US interest rates may be tempered this week by a report on Wednesday expected to show the country's trade gap swelled to a record $61.5 billion in March, according to the median forecast in a Reuters poll.
"There's now no doubt that the Fed will raise rates again in June and that's helping the dollar," said Mitsuru Sahara, vice president of forex dealing at UFJ Bank.
"But I'd be wary of predicting further gains. It's going to be hard for the dollar to rise higher if the US keeps chalking up record trade deficits every month," he said.
The yen rose briefly after Fitch Ratings upgraded the country's sovereign rating outlook to stable from negative, citing a stronger economy. Japan's local long-term currency rating is AA-, the lowest of Group of Seven countries.
The dollar stood at around 105.30 yen, up 0.25 percent from late US trading on Friday. The euro slipped to around $1.2800 from $1.2820, in sight of a three-month low below $1.2766.
The single European currency edged up to 134.80 yen from a three-month low near 134.40 yen on Friday.
After the jobs report, a Reuters poll of 20 primary dealers with the Fed found that all expect the central bank to raise rates by another 25 basis points at its next meeting in June. Almost all primary dealers surveyed saw another hike in August, and the poll's median forecast was for a fed funds rate of 4 percent at the end of 2005 compared with 3 percent now.
While higher US rates would make dollar-based deposits more attractive by increasing the yield advantage against the euro and the yen, some traders said the US currency's rise versus the yen could be capped.
"The dollar's gains against the yen will be slowed because we still have the yuan issue on our hands," said a trader at a Japanese bank.
China's finance minister said last week that intense speculation about a yuan rise had made it difficult for Beijing to push forward on currency reform.
Chinese Vice Finance Minister Li Yong said on Friday that he did not think upward pressure on the yuan was so great and urged currency speculators to be patient over yuan reform.
Analysts expect an unshackling of the yuan's peg to the dollar to spark a rally in Asian currencies, which have risen much less than the euro against the US currency due to massive government intervention aimed at protecting exports.
Traders will closely watch a meeting between officials from the US Treasury Department and the People's Bank of China due later in the day. The discussion will include foreign exchange issues, US officials said.
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