Dollar, Yen May Extend Gains as U.S. Job Cuts Pare Yield Demand

July 3 -- The dollar and yen may extend their advances against the euro after a U.S. government report showed employers cut more jobs last month than economists forecast, paring demand for higher-yielding assets.

The euro also dropped versus the dollar yesterday as European Central Bank President Jean-Claude Trichet said a “phase of recovery” for the region will probably start in the middle of 2010. The dollar earlier climbed versus the euro after China renewed its call for a stable greenback and damped speculation the nation is seeking talks on a new international currency at next week’s Group of Eight meeting.

“There was some enthusiasm and relief recently for all of us, and now we have to be aware things will take some time to recover,” said Benedikt Germanier, a currency strategist in Stamford, Connecticut, at UBS AG, the world’s second-largest currency trader. “Risk appetite has gone a little far. Risk aversion could well be back.”

The dollar traded at $1.4001 per euro at 6:07 a.m. in Tokyo, after advancing 1 percent yesterday. The U.S. currency was at 95.91 yen following a decrease of 0.7 percent. The euro fetched 134.26 yen after depreciating 1.7 percent.

U.S. employers eliminated 467,000 jobs in June after a revised decrease of 322,000 in the previous month, the Labor Department reported yesterday in Washington. The median forecast of 79 economists surveyed by Bloomberg News was for a reduction of 365,000. The unemployment rate increased to 9.5 percent.

Dollar Index Rises

The Dollar Index, which tracks the greenback against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, gained 1.6 percent on June 5, the most in more than four months, after the payrolls report showed job losses in the previous month slowed.

The trade-weighted measure climbed the most in more than a week yesterday, advancing 0.8 percent to 80.26. The level was 0.5 percent higher compared with June 26.

The U.S. currency gained earlier yesterday versus the euro as China’s Vice Foreign Minister He Yafei renewed a call for a “stable” dollar and said in Beijing he’s “not aware” of any effort by China to challenge the greenback’s status as the world’s main reserve currency at next week’s G-8 meeting.

The dollar declined beyond $1.42 versus the euro on July 1 after Reuters cited G-8 sources as saying the Asian nation asked to debate proposals for a new global reserve currency at next week’s summit. China is the biggest foreign holder of Treasuries, with $763.5 billion as of April.

European Central Bank

The ECB kept its benchmark interest rate unchanged at 1 percent yesterday. The central bank lent financial institutions last week a record 442 billion euros ($621 billion) for 12 months to encourage them to extend cheaper credit to companies and households. The ECB will also start buying 60 billion euros of covered bonds this month.

Europe’s 16-nation currency will probably fall to $1.33 by the end of September as economic data globally will strengthen arguments for a weaker recovery, according to Lauren Rosborough, a foreign-exchange strategist at Westpac Banking Corp. in London.

“We all know the euro should weaken,” said Rosborough, citing Westpac’s forecast for no growth in the euro area in 2010. “We are not talking about a rapid recovery and certainly not a strong one.”

Sweden’s krona declined as much as 2.6 percent to 7.7837 against the dollar, the biggest intraday drop since June 15, after the Riksbank unexpectedly cut its target lending rate by a quarter-percentage point to 0.25 percent, saying the economy required a “somewhat more expansionary monetary policy.”

The reduction was forecast by only one economist, UBS’s Sunil Kapadia, of 17 surveyed by Bloomberg News, with the rest predicting no change.

Swedish ‘Surprise’

“That was a big surprise for most people,” said Henrik Gullberg, a currency strategist in London at Deutsche Bank AG, the largest foreign-exchange trader. “They continue to be one of the most dovish central banks around, and this will stall an appreciation of the krona.”

The krona advanced on July 1 to 7.5410 against the dollar, the strongest level since June 3.

The Swiss franc slid yesterday as much as 0.3 percent to 1.5247 against the euro after a Swiss National Bank governing board member, Thomas Jordan, said the institution remains ready to act to prevent further appreciation of the currency.

“The SNB will continue to weaken the Swiss franc,” said Paul Robson, a currency strategist in London at Royal Bank of Scotland Group Plc. “You always have to take the SNB seriously on the franc. They’ve backed it up with fiscal intervention, and we would expect them to continue.”

The franc dropped as much as 2.4 percent on June 24 on speculation policy makers intervened to support the economy.