The dollar rose against the euro and sterling on Friday after stronger-than-expected manufacturing data offset news showing the US economy shed jobs last month for the first time in 4-1/2 years. The US labour market contracted in January for the first time since August 2003, according to government data on Friday.
That initially sparked widespread dollar selling. But some analysts said a weakening employment trend was not new and therefore prompted dealers to take profits on their bets against the dollar shortly afterward.
This accelerated after the Institute for Supply Management said its January manufacturing index reflected expansion, obscuring the outlook for the economy in general and injecting some doubt into the argument that a recession is looming.
The euro fell to $1.4796, down half a percent from late Thursday, reversing course after touching a two-month high of $1.4952 earlier in the session, according to Reuters data.
"This data really is making for some very choppy trading," said Shaun Osborne, senior currency strategist at TD Securities in Toronto. "The ISM index in particular muddies the outlook." Sterling steadily fell throughout the New York session and was last down 1.1 percent at $1.9660.
The dollar rose 0.2 percent on the day to 106.55 yen, continuing to move in lock-step with equity markets. Some analysts said Friday's price action was short term in nature and merely a reaction to headlines. Their medium-term view was for continued weakness in the dollar because of US economic deterioration.
"There's a lot of short-term profit-taking going on," said Dustin Reid, a currency strategist at ABN Amro in Chicago. "More dollar weakness (is expected) in the days ahead, though. This is only a short-term bounce."
However, after a week chock-full of mixed US economic data, a steady stream of negative news from the housing and banking industries, and even a Federal Reserve reduction in its benchmark interest rate, the dollar was only marginally lower. With the US federal funds rate now the third-lowest among major economies, the appeal of holding dollar-denominated debt should be driving investors away from the greenback.
For example, the yield spread of the 2-year euro-zone bond over the 2-year Treasury note widened to 135 basis points on Friday, blowing out by 40 basis points in January alone. The European Central Bank, meanwhile, continues to dwell on inflation and has not hinted at plans to slash benchmark interest rates, which at 4 percent stand a full percentage point above US rates.
But the euro has repeatedly tried and failed to capitalise on dollar weakness and has yet to test an all-time high of $1.4966 hit late last year, according to Reuters data.
"The more the dollar deflects everything thrown at it, the more convinced I become that the currency is putting in a major bottom," said David Gilmore, partner at Foreign Exchange Analytics in Essex, Connecticut.
He added that it's "only a matter of time before the currency market punishes other currencies. For the euro, this punishment will come in the form of betting the ECB got it very wrong by chasing inflation dragons."
High-yield and commodity currencies were big gainers on the day, with the US dollar falling 1 percent against its Canadian counterpart to C$0.9935. The Australian dollar rose 0.9 percent to US $0.9042 and was up 2.8 percent this week. The New Zealand dollar, the highest yielder among G10 currencies, was on track for a 3.3 percent gain this week, its biggest weekly gain since late September.
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