The dollar rose against the euro and sterling Friday after a report showed a gauge of U.S. manufacturing in January was higher than expected, helping the U.S. currency recover after soft labor market data earlier in the session.
The January jobs market data showed the first contraction since August 2003. But some analysts said the weakening trend in employment was not necessarily new, prompting dealers to take profits on their bets against the greenback shortly afterward.
This accelerated after the Institute for Supply Management said its manufacturing index reflected expansion in the sector, obscuring the outlook for the economy in general and injecting some doubt into the argument that a recession is looming.
"All in all, it's a supportive report for both stocks and the dollar after the weak payrolls reading earlier this morning," said Matthew Strauss, currency strategist with RBC Capital Markets in Toronto.
The euro fell , reversing course after touching a two-month high of $1.4952 earlier in the session, according to Reuters data.
Sterling steadily fell throughout the New York session.
The dollar was unchanged on the day versus the yen, continuing to move in lock-step with equity markets.
Some analysts said Friday's price action was short-term in nature and merely a reaction to headlines. Frustration was also setting in that the euro has been unable to capitalize on dollar weakness and test its all-time high of $1.4966, according to Reuters data.
Their medium-term view was for continued weakness in the dollar because of U.S. economic deterioration.
"There's a lot of short-term profit-taking going on and some levels weren't reached in euro and yen," said Dustin Reid, currency strategist with ABN AMRO in Chicago. "More dollar weakness in the days ahead though. This is only a short-term bounce."
However, after a week chock full of mixed U.S. economic data and even a Federal Reserve reduction in its benchmark interest rate, the dollar was only marginally lower.
The dollar's resilience came despite an increasing bond yield disadvantage against the euro and other major currencies, since the federal funds rate is now the third-lowest among major economies.
For example, the yield spread of the 2-year euro zone bond over the 2-year Treasury note widened to 135 basis points on Friday, blowing out by 40 basis points in January alone.
Foreign investors would presumably continue to be rewarded with more yield by holding euro-denominated bonds over dollar-denominated.
Meanwhile, so-called high-yielding currencies such as the Australian dollar and the New Zealand dollar have been the biggest gainers this week among developed economies.
Australia's currency was up 0.6 percent to US$0.9015 on the day and up 2.6 percent on the week. The New Zealand dollar rose 0.7 percent to US$0.7930 and was 3.3 percent higher on the week.