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Dollar Climbs as Investors Reassess Risk

The dollar gained in quiet trade Monday against most major currencies as investors reassessed risk and bet that Friday's sell-off on a U.S. payrolls report was overdone.

Dollar and Euro
Dollar and Euro

September job growth was the best since May and eased concern about an imminent U.S. recession, but some dealers sold the dollar on concern the economy is not growing fast enough to prevent the Federal Reserve from cutting interest rates further.

Monday's gains came as investors decided the jobs report indicated some vigor in the economy.

Adding to the dollar's strength was concern that the Group of Seven nations may address dollar weakness at their upcoming meeting, which could leave some investors who had been betting on the dollar's continued decline caught short.

"Today we have a more appreciative view of the job numbers and a more careful assessment of risk," said Joe Trevisani, chief market analyst at FX Solutions in Saddle River, N.J. "The job number wasn't so bad."

The euro slipped 0.6 percent to $1.4043, off its record high of $1.4281 hit last week, and below its level of $1.4135 late on Friday in New York, according to Reuters data, as the jobs data reduced chances that the Federal Reserve would cut interest rates this month. Traders said near-term support kicks in around $1.4030.

The dollar index last traded at 78.774, above its record low of 77.660.

The greenback also climbed to 117.38 yen , a gain of 0.4 percent from 116.96 yen late Friday and its highest level since a credit crisis sparked by losses on U.S. mortgages roiled markets in mid-August.

Analysts said traders had recovered their taste for carry trades that use cheaply borrowed yen to buy higher-yield currencies.

ECB on Hold

Markets now see euro-zone rates on hold for the rest of 2007 after European Central Bank President Jean-Claude Trichet spoke of downside growth risks last week, and that has moved interest-rate differentials in favor of the dollar.

With markets in Japan and Canada closed for holidays and the U.S. bond market also shut for Columbus Day, trade was light, leaving the dollar near the top of rather narrow ranges.

"The jobs data last week wasn't great but at least it suggested we're not headed for recession, and that's reduced chances of a rate cut," said Meg Browne, currency strategist at Brown Brothers Harriman in New York. "We're going to be in ranges for now...there's really not much to trade on today."

The U.S. jobs report showed the U.S. economy added 110,000 jobs last month. It also showed a gain of 89,000 jobs in August, revising an initially reported contraction in payrolls that month.

That left futures reflecting a 44 percent chance of a Fed rate cut on Oct. 31, lower than the 75 percent priced in last Thursday, the day before the jobs report.

Talking the Euro Down

Elsewhere, outgoing International Monetary Fund chief Rodrigo Rato said the dollar was undervalued. Various European officials have also complained about the dollar's decline and worried a strong euro would undermine the euro-zone economy.

Europe's finance and economy ministers were meeting in Luxembourg on Monday and Tuesday, where they were expected to craft a unified approach to the dollar's decline heading into a G7 meeting next week.

"It's rare but every once in a while, the G7 makes a push to move the markets verbally one way or another," said Trevisani of FX Solutions. "When it is a surprise, it can have some effect."

But German Finance Minister Peer Steinbrueck said a strong euro is better than a weak one, casting doubt on whether the euro/dollar exchange rate would be on the G7 agenda.

Browne said the G7 won't be able to focus on the dollar without also addressing the value of the Chinese yuan and Japanese yen, two other currencies seen as undervalued.