The dollar fell Friday as a solid U.S. employment report was not enough to convince investors the U.S. economy is growing fast enough to keep the Federal Reserve from cutting interest rates again.
The greenback rose sharply after the data showed September U.S. jobs growth of 110,000, the highest since May, and upwardly revised numbers for August and July, but the rally petered out ahead of the long Columbus Day holiday weekend.
"Even if you get some better news in terms of the employment report balancing out some of the doomsday scenarios for the U.S. economy, we still have a situation in which the Fed has eased and will likely ease further because of the risks to growth, while other central banks are on hold or tightening policy," said Sophia Drossos, currency strategist with Morgan Stanley in New York.
In late afternoon trading in New York, the dollar index, a gauge of the greenback's value against a basket of major currencies, was down 0.2 percent at 78.324. After the jobs data, the index rose as high as 78.819. On Monday it had dropped to an all-time low of 77.660.
The euro fought back from earlier losses to trade little changed at $1.4140.
But the dollar rose 0.3 percent to 116.85 yen .
Second-Guessing the Fed
Commodity-related currencies were the biggest movers among the world's most liquid.
The Australian dollar climbed to a 23-year high of $0.9004 and was last up 1 percent at $0.8970.
The U.S. dollar tumbled to a three-decade low against the Canadian dollar of C$0.9816, falling 1.5 percent, the biggest daily decline in three years, after data showed the Canadian unemployment rate was the lowest in 33 years.
Despite the strong jobs report, "it didn't take long for the market to refocus on the overall fundamental weakness that remains for the U.S. dollar," said Camilla Sutton, a currency strategist at Scotia Capital in Toronto.
G7 On Its Way
While the jobs report reduced the chances of a cut in the Fed's benchmark federal funds rate this month, it did not eradicate them. The futures market reflected a 50 percent perceived chance of a cut in the benchmark rate, down from a roughly 70 percent implied chance prior to the payrolls report.
Since mid-August, when a crisis in the U.S. subprime mortgage market practically froze bank lending, the dollar has been on a one-way road downhill. The sell-off accelerated after the Fed slashed the fed funds rate by a half percentage point to 4.75 percent last month.
But this week's U.S. economic data, as well as less-than-hawkish comments from European Central Bank President Jean-Claude Trichet, have at the very least introduced more two-way traffic.
"The jobs report makes what the Fed will do in October a very close call," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
The focus in the market has shifted to an upcoming meeting of finance ministers and central bankers from the Group of Seven rich nations this month and a Fed policy meeting at the end of the month.
Growing complaints by European politicians about the euro's strength have added the risk in the market that the dollar could find firm footing in the run-up to the G7 meeting.
On Friday, French President Nicolas Sarkozy's spokesman said France's position on the euro's surge is increasingly finding wider backing in Europe.