The dollar rallied for a third day after a surprisingly strong report on jobs growth in December led investors to scale back expectations for a Federal Reserve interest rates cut in the next six months.
The dollar jumped to a six-week high against the euro after the Labor Department said the U.S. economy generated 167,000 new jobs in December, well above market expectations for a rise of 100,000.
"For the time being, with this reasonable number that you have, the likelihood of a Fed rate cut is off the table," said John McCarthy, vice president of foreign exchange at ING Capital Markets in New York. "That's lending a bit of support to the dollar."
Several analysts said they are not expecting the Fed to cut interest rates from the present level of 5.25 percent any time soon, especially since the data also showed the largest rise in average hourly earnings in eight months.
Robust job growth, coupled with upward pressure on hourly wages, will likely keep the Fed concerned enough about inflation to leave its key interest rate on hold for at least several months to come, analysts said.
The euro dropped to it's lowest since Nov. 24. A break below $1.2980 would likely trigger a wave of automatic sell orders, adding momentum to the euro's decline, traders said.
With Friday's decline, it was the worst three-day decline for the euro against the dollar since Nov, 2005 at current prices.
Meanwhile sterling fell to a six-week low and last traded .
In a further sweetener to dollar bulls, the government also revised up its estimates of job growth in October and November, suggesting the labor market is proving more resilient than many economists had thought.
"The employment report prompted a knee-jerk reaction higher in the dollar as players were surprised at the unexpected gains in jobs as well as the accelerated pace of wage growth," said Michael Woolfolk, New York-based senior currency strategist at The Bank of New York in a note to clients.
Investors will be looking to U.S. retail sales and trade data next week for further evidence on the state of the U.S. economy.
The dollar also wiped out much of its early losses against the yen, -- well above the session low of 117.98 yen.
The yen had rallied across the board earlier in the session as some investors closed up "carry trades," in which they had sold low-yielding currencies such as the yen for high-yielders like the New Zealand dollar.
Some traders this week have cited rising speculation that the Bank of Japan may raise interest rates to 0.5% at a policy meeting later this month. In addition, a sharp decline in raw materials prices this week has hurt the currencies of commodity exporters such as Australia and New Zealand -- popular targets of carry trades.
This has sent some investors scrambling to buy back the yen and Swiss franc, the most popular funding currencies of such trades. The Swiss franc dipped against the dollar , but elsewhere strengthened across the board.