The dollar eased to a four-month low against major currencies on Friday and looked set to extend losses after a solid US February jobs report did little to alter expectations for Federal Reserve monetary policy. The euro broke above the psychologically important $1.40 level and headed for its biggest weekly rise in six weeks.
The single currency is on course to make a run toward $1.4283 - a key resistance level touched last November - after European Central Bank President Jean-Claude Trichet hinted Thursday at an April interest rate rise. Nonfarm payrolls increased 192,000 in February, the US Labour Department said, topping forecasts of 185,000 jobs. The unemployment rate dipped to 8.9 percent, the lowest since April 2009, compared with 9.0 percent in January.
The US jobs report "is overshadowed by Trichet's very hawkish comments" on Thursday, said Paresh Upadhyaya, head of Americas G10 FX Strategy at BofA Merrill Lynch Global Research in New York.
"The focus in currency markets will remain on interest rate differentials and that has been clearly on an upward trend in favour of the euro," he said. "So the price action at least for the next week or two should favour upside bias for the euro." While the data sent a strong signal the labour market recovery has become self-sustaining, analysts said the number was still close to forecasts, disappointing investors who had hoped for an even stronger report.
Federal Reserve officials, who next meet on March 15, will likely welcome February's sturdy employment report, but probably still regard the pace of job creation as too slow to change the US central bank's ultra-easy monetary policies. "We are seeing some gradual improvement in the labour market but not dramatic enough to change Fed policy," said Steven Englander, head of G10 strategy at Citigroup in New York. "The Fed will look at this data and see no reason to change policy."
The dollar index, which measures the greenback against a basket of major currencies, fell as low as 76.275, the lowest since November 5. The euro last traded at $1.3985, up 0.2 percent on the day, after surging as high as $1.4009 on trading platform EBS, the strongest level since early November. The euro has moved sharply higher against the dollar in recent weeks amid growing expectations the ECB will raise interest rates before the US central bank does.
ECB rate speculation has pushed yields on two-year German government bonds - the maturity most sensitive to official rate moves - roughly one full percentage point higher than those of their US counterparts this week. The spread between the two hit its widest since January 2009.
Gains in the euro could be limited, however, amid concerns about debt problems in Spain, Portugal, Ireland and Greece. A rise in rates would increase the cost of funding for these highly-indebted economies. Euro zone leaders will meet on March 11 to hammer out a comprehensive package of measures against the bloc's debt crisis, before signing off on any deal on March 24-25.
"The sovereign debt issue has been dormant but is not dead. it will likely move back to the forefront at the upcoming summits this month," Englander said. The dollar slipped 0.1 percent to 82.32 yen, retreating after earlier rising as high as 83.09 yen on EBS immediately after the release of the payrolls report.
The safe-haven Swiss franc rose as violent clashes in Libya intensified between rebel forces and loyalists to Muammar Gaddafi, heightening worries that political instability in the region could disrupt oil supplies. The dollar fell 0.6 percent to 0.9262 Swiss franc, while the euro lost 0.5 percent to 1.2947 francs.