The dollar rallied sharply on Friday as a mix of technical positioning, solid US jobs data and the Treasury secretary's remarks on the Chinese yuan led to a day of volatile trade.
A report showing the economy added 132,000 jobs last month initially boosted the dollar against the euro, but it quickly gave up its gains amid a flurry of euro buying and data showing US consumer sentiment sagged in December.
But the market turned yet again, and dollar-buying picked up when US Treasury Secretary Henry Paulson said in an interview on cable network CNBC that China needs more foreign exchange flexibility.
Although Paulson was calling for a stronger yuan, "people interpreted (his) comments as being somewhat more bullish to the dollar," said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington.
Peter Schiff, president of EuroPacific Capital in Darien, Connecticut, said Paulson's remarks simply appeared to have intensified a dollar short-covering rally that began shortly before he started speaking. In late afternoon trading, the dollar was up 1 percent at 116.40 yen, just off a session peak at 116.51, according to EBS.
The euro, which at one point climbed to $1.3364, exited New York trade down more than 0.6 percent at $1.3207, having chalked up its biggest single-day decline in two months. Traders also cited speculation that the European Central Bank was in the market checking the rise of the euro - with one dealer even mentioning $1.3360 as the level in question - but an ECB spokesman declined to comment.
Such talk "is hard to prove, but it definitely adds to volatility," Salvaggio said.
Volatility was the order of the day, however, and traders said some of the counterintuitive price action was tied to speculative positioning. "I think there were some not-so-friendly accounts out there today, some very aggressive intraday traders and fast money players getting involved," one dealer said.
The dollar had come into the session under a thick cloud that began to accumulate two weeks ago and has since pushed the euro to 20-month highs around $1.3370. Dollar weakness has been tied to views that slower US growth is likely to push the Federal Reserve to cut interest rates in early 2007 even as the ECB and other central banks push rates higher, thereby eroding the dollar's yield advantage.
Analysts said the pervasive negative sentiment, coupled with year-end position squaring, was keeping the greenback under pressure and helped explain its rather modest initial gains on Friday following better-than-expected jobs data.
"The foreign exchange market is still leaning toward a softening economy," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida. A decline in the University of Michigan's consumer sentiment index for December didn't help, he said.
But the yen selling was also a theme on Friday, sparked overnight after a report showed the Japanese economy grew by 0.2 percent in the July-September period, below an initial reading of 0.5 percent. That cast some doubt on whether Japanese rates will raise from their current 0.25 percent before year end. The euro rose 0.45 percent to 153.73 yen.
Elsewhere, sterling was down half a percent at $1.9536, as the dollar rally continued to chip away at a move that took the pound above $1.98 last week for the first time in 14 years.