The US dollar appeared to stabilize on Friday after hitting three-month lows against the euro, as the market mulled a positive US labor market report and fears for the hurricane-hit US economy.
The euro rose as high as US$1.2589, its strongest showing against the greenback since May 27. The single currency traded at US$1.2528 at 9pm GMT from US$1.2500 on Thursday. The dollar meanwhile edged up to ¥109.92 after ¥109.78 on Thursday.
The dollar steadied after official figures showed that non-farm payrolls increased by a seasonally adjusted 169,000 last month. While that was less than many had expected, it showed a relatively strong growth path for the US economy before Hurricane Katrina's devastation.
"A solid employment report that shows no sign of a retrenchment in hiring," was how Drew Matus, financial economist at Lehman Brothers, described the announcement from the Labor Department.
"Nonfarm payrolls painted a mixed picture today," said Boris Schlossberg, currency analyst with Forex Capital Markets.
That picture proved enough to persuade currency traders to pocket some of the gains made in their euro and pound trades against the dollar this week.
But analysts said sentiment remained against the US currency, especially if the market continues to scale back US rate hike expectations.
A meeting between US President George W. Bush and US Federal Reserve Chairman Alan Greenspan on Thursday fueled market speculation that the central bank could halt its rate-rise campaign much sooner than expected.
"The combination of higher energy costs and signs of economic slowing over the past few weeks has seen the market trimming rate hike expectations," said Jon Gencher at BMO Nesbitt Burns.
"The net impact wrought by Hurricane Katrina is still to be seen, and much of the recent price action in financial markets has been emotional, with the market quick to revise GDP estimates lower as well as almost pricing out anything more than one rate hike of 25 basis points by year end."
Going by the Fed funds futures rate, there is only a 70 percent chance of a quarter point rate hike in the United States when the Fed makes its decision on Sept. 20.
Players are also starting to bet that US rates will go no higher than 3.75 percent. Previously hikes up to 4.00 percent or 4.25 percent had been expected.
The dollar was in the doldrums for much of the last couple of years, due to concerns over the financing of the US budget and current account deficits but surged to 10-month highs in early July in the wake of political crises engulfing the EU as well as a greater emphasis on developments in yield differentials.
"There is plenty of speculation that the economic fallout from Katrina and more importantly, the coming oil price shock, will keep [Federal Reserve policymakers] from tightening when [they] meet on Sept. 20," said Mark Austin, global head of Forex strategy at HSBC.
In late New York trade, the dollar stood at 1.2303 Swiss francs from SF1.2326.
The pound was being traded at US$1.8419 after US$1.8348 late on Thursday.