The dollar finished its first losing week in the past six against the yen, as declining consumer spending and rising unemployment added to evidence the US economy is shrinking.
"You have to take the numbers for what they are, which is pretty negative" for the economy and the dollar, said Jim McCormick, a currency strategist at Lehman Brothers. "There's very little doubt, at this point, the US is in recession."
The government said today the US jobless rate rose to a five-year high of 5.4 percent last month, as the economy shed 415,000 non-farm jobs, the most since May 1980.
From last Friday, the US currency fell 0.8 percent to ?121.76 on Friday, snapping a five-week rally. The dollar also weakened 1 percent against the euro this week, to US$0.9022 per euro, after three weeks of gains.
McCormick expects the dollar to reach as weak as US$0.95s per euro in coming months, which would be its worst level since mid-January. How fast that happens may depend on how far the Federal Reserve cuts interest rates to revive the US economy, he said.
If the central bank slows its pace of rate cuts, the dollar probably will fall faster, as investors conclude the economy won't get more help in the way of lower borrowing costs, McCormick said.
The Fed's policy-making committee meets Tuesday.
The dollar dipped, then recovered, after the US report on employment today. Some traders said there had been speculation the job losses would be even deeper than the 300,000 median estimate in a Bloomberg News poll.
The worse-than-anticipated report also may have helped the dollar by raising the odds the Fed will opt for a larger interest-rate cut next week, boosting expectations the US will pull out of its slump before Europe or Japan, analysts said.
Rising unemployment means the Fed will do "more, rather than less," to revive the economy, said Eric Nickerson, head of global markets research at Bank of America Corp.
``That's what the currency market is reflecting,'' with the dollar's recovery from early lows today against the euro and yen, Nickerson said. The US currency at one point had erased all of its losses for the day against both currencies.
"The dollar has held up remarkably well this week," said Gwen Swanger, who helps manage about US$5 billion as head of international fixed-income research at Principal Capital Income Investors in Des Moines, Iowa.
Part of the explanation for the dollar's resilience is that growth prospects are also dimming in the Europe.
Traders sold euros today after the Reuters Purchasing Managers' Index showed European manufacturing shrank in October for a seventh consecutive month, contracting at its fastest pace on record.
"Our expectation on Europe is growth to the downside," said Swanger. Principal figures euro-region growth will be about 1.6 percent this year, compared with a forecast of a 1.1 percent rate of expansion for the US.
Bank of America's Nickerson said Friday's report makes it more likely the Fed will cut banks' overnight borrowing costs half a percentage point to 2 percent next week. That, he said, would buoy the dollar.
Currency investors will then look to Thursday's expected decision on interest rates by the European Central Bank. A failure by that bank to lower rates may boost the dollar further.
Swanger at Principal said she expects a quarter-point cut from the euro zone's central bank next week, lowering the region's benchmark rate to 3.5 percent and supporting the euro.
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