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Soft economic conditions drag on dollar

The US dollar fell on Friday as a disappointing US payrolls survey highlighted soft economic conditions that boosts the risk of recession and further rate cuts by the Federal Reserve.

At 10pm GMT, the euro rose to US$1.4765 from US$1.4746 in New York late on Thursday.

The US dollar fell to ¥108.63 from ¥109.30 late on Thursday.

The data from the US Labor Department on Friday showed that only 18,000 new jobs were created last month, well below the 70,000 rise expected by analysts.

Further bad news emerged with the news that the unemployment rate, taken from a separate survey of households, jumped to 5 percent last month, the highest rate since November 2005 and higher than the 4.8 expected by economists.

The markets interpreted the data as increasing the likelihood that the Fed would continue to cut interest rates this year in order to avoid a recession.

"This data raises the probability of the Fed lowering rates by 50 basis points at their next meeting on Jan. 30," Hilary Love at PNC Bank said.

The dollar managed to claw back some losses against the euro, to the surprise of some analysts.

"I'm surprised that the euro hasn't managed US$1.49 this week," John Kicklighter at Forex Capital Markets said. "We have seen unusual volatility thanks to the unusual liquidity conditions and traders putting trades back on their books for the new year."

Other data on Friday helped stem the selling tide, helping the US currency to move off its lows.

The non-manufacturing Institute of Supply Management (ISM) index fell to 53.9 last month from 54.1 in the previous month and a sliver above the market consensus for 53.8.

While not as bad as the payrolls data, the ISM figure confirmed the theme of slowing growth in the services sector, the biggest part of the economy and the most vulnerable to the tighter credit conditions that have emerged.

"The service sector is expanding but is under some pressure. That is consistent with the view that growth will be positive, but pretty weak," Joel Naroff of Naroff Economic Advisors said.

"Coupled with the manufacturing and employment reports it strongly suggests that the economy could use some more help," Naroff said.

"So I think we can assume a rate cut is likely on Jan. 30. A 50 basis point move would make sense as we really do need to get through neutral and start putting the pedal to the metal," he said.

In late New York trading, the dollar stood at 1.1084 Swiss francs from SF1.1110 on Thursday.

The pound was at US$1.9729 after US$1.9713.
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