Mon Aug 9, 2004
By Kyle Peterson

CHICAGO (Reuters) - The dollar on Monday reclaimed some of the sharp losses suffered after a surprisingly weak U.S. jobs report on Friday that tempered expectations for Federal Reserve interest rate hikes this year.

Monday's price action paled in comparison with Friday's -- a sell-off that resulted in the dollar's biggest one-day loss in two years against an index of major currencies.

After the jobs report, most in the market still expect the Fed to raise interest rates for the second time in six weeks at its policy meeting on Tuesday, but are now less confident of a further rate rise in September.

"They're going to hike tomorrow," said Tim Mazanec, director of foreign exchange, Investors Bank & Trust Co. in Boston. "And the market consensus is that tomorrow could be it."

News the U.S. economy generated only 32,000 new jobs in July -- less than one-seventh of what the market expected -- raised doubts over the sustainability of the U.S. recovery and sent the dollar 2 cents lower against the euro in a matter of minutes.

The Federal Reserve raised interest rates for the first time in four years at the end of June and signaled the quarter-point hike to 1.25 percent would be the start of a "measured" campaign to return borrowing costs to more normal levels.

In early New York trade, the euro was down 0.14 percent at $1.2256 (EUR=: Quote, Profile, Research) after soaring to a two-week high on Friday. The dollar was up 0.22 percent at 110.76 yen (JPY=: Quote, Profile, Research) .

The dollar gained 0.38 percent to 1.2551 Swiss francs (CHF=: Quote, Profile, Research) . Sterling was trading nearly flat at $1.8401 (GBP=: Quote, Profile, Research) .

Monday's economic data calendar was light, featuring only data on wholesale inventories at 10 a.m. EDT and the Kansas City Fed's Manufacturing Survey 11 a.m. EDT.

FED POLICY

All eyes are fixed on the Fed's policy meeting on Tuesday. Fed Chairman Alan Greenspan said last month that weakness seen in June was likely to be a passing phenomenon, but the sell-off in equities and the dollar that followed Friday's jobs numbers show investors are now less convinced of this view.

A Reuters poll of Wall Street economists taken after Friday's payrolls data showed all 20 of the primary dealers surveyed expected that on Tuesday the Fed will hike its benchmark federal funds rate a quarter-point to 1.5 percent.

The tone of the Federal Reserve's accompanying statement on Tuesday could have a big impact in shaping expectations for the future path of U.S. monetary policy.

"The Fed had previously been quite optimistic and Greenspan was talking about a soft patch in the economy," said Tim Fox, market strategist at National Australia Bank in London.

"The markets will probably look for a more balanced view of the economy."

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