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Expected Fed rate hike bolsters dollar against major rivals

The US dollar gained on the euro on Friday as a stronger-than-expected US jobs report fed expectations that the Federal Reserve will raise interest rates next week.

Shortly before 9pm GMT, the euro was at US$1.2355, compared to US$1.2388 on Thursday.

The dollar rose to ¥111.89 from ¥111.20 a day earlier.

The Chinese yuan closed at 8.1037 to the US dollar on Friday, down from the previous finish at 8.1027.

Data from the Labor Department showed that the US economy had created 207,000 new jobs in July, significantly more than the 180,000 forecast by analysts.

Figures for the previous two months were also revised upwards, meaning the number of new jobs in June was 166,000, against an initial estimate of 146,000, and 126,000 in May compared with the first estimate of 104,000.

US Treasury Secretary John Snow said the report was "another significant indicator that America's economy is expanding."

The non-farm payroll report also showed average hourly earnings rose by US$0.06 to US$16.13 last month, the fastest gain in a year. Several economists said that could herald inflationary pressure.

The report raised the specter of another interest rate hike when Fed policymakers meet to review monetary policy on Tuesday.

"As far as we stand, there is nothing stopping the Fed," said Kathy Lien, senior currency analyst at Forex Capital Markets.

"A quarter-point hike to 3.5 percent has already been priced into the market," Lien said.

"Today's blockbuster report makes four percent almost a certainty with the Fed possibly even overshooting to 4.25 percent" in coming months, she said.

"Was the jump in wages a one-shot wonder or does it portend accelerating labor costs? That is the unknown right now," said Joel Naroff, president of consulting firm Naroff Economic Advisors.

"But if it does say the tightening labor market is finally flowing through to workers in terms of higher payroll costs, then the Fed may find even more reasons to continue the rate-hike program," he said.

Higher rates make the dollar more attractive on a yield basis relative to the currencies of the other industrialized nations. Prospects for higher rates had allowed the bruised greenback to rally back some 10 percent in the first half of this year, but the rally has been showing signs of fatigue.

Sterling stood at US$1.7789, from US$1.7805 at the end of Thursday.

The US dollar was quoted at 1.2449 Swiss francs from SF1.2385 on Thursday.
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