The dollar strengthened against the yen, euro and Swiss franc, after a report showing U.S. jobs growth gave investors courage to add to riskier trades financed by borrowing in low-yielding currencies.
February payrolls growth was close enough to consensus forecasts and upward revisions to jobs created in January and December, along with a narrower-than-expected U.S. trade gap, allayed concerns about softness in the economy and whetted investor appetite for risk.
"A slightly lower U.S. trade deficit and a labor market report in line with expectations was enough to restore investor confidence," currency strategists with BNP Paribas said in a note.
"Talk that 'carry is back' is making the rounds and the powerful rebound of yen crosses leaves the impression that last week's rise of capital market volatility was just a blip and not the start of a new trend," they added.
The dollar has risen 1.3% this week versus the yen, erasing more than half of the losses incurred because of the shakeout in carry trades last week. The euro climbed 0.7% against the Japanese currency.
The dollar was up slightly versus the euro.
The greenback and euro also firmed against the Swiss franc.
"It looks like people are feeling more comfortable that the spasm seen last week is receding," said Marc Chandler, senior currency strategist, at Brown Brothers Harriman in New York.
Analysts cautioned, however, that last week's sudden run-up in volatility, which pushed the yen to three-month highs against the dollar and pummeled global stock markets, may return.
Carry On, Cautiously
High-yielding currencies, such as the New Zealand and Australian dollars as well as emerging market currencies, got a boost after the payrolls report, which showed jobs growth of 97,000 last month, and data showed the U.S. trade deficit narrowed to $59.1 billion in January.
The New Zealand dollar rose more than 1% versus the greenback. Against the yen, the high yielder was on pace for a 1.8% gain compared with last week's 6.3% decline.
Analysts say that it might be too early to call an end to the unwind of carry trades, especially since positions built up against the yen had become so extreme for so long.
"The unwinding of established positions, especially carry, is likely to be a long process," said analysts at State Street Global Markets.
Next week's U.S. inflation and capital flows reports could test the mettle of investors ready to leverage back up their carry trades.
Friday's jobs report caused traders to pare bets on a possible Federal Reserve interest rate cut by midyear, relieving some pressure on the dollar.
U.S. short-term interest rate futures fell after the labor data, showing chances for a rate cut by May at just 4% against 22% on Thursday.