The dollar fell sharply today after a report showed US jobs growth in June was far more sluggish than expected, heightening concerns that the US economic growth is slowing.
The euro shot up to $1.2865 from around $1.2780 after government data showed the US economy added 121,000 new jobs in June, well below the median economists' forecast of 185,000. It later eased to around $1.2835, up 0.43 per cent on the day.
Markets were geared up for a much higher number, especially after employment firm ADP said earlier this week it estimated the private sector added 368,000 new jobs in June, prompting some Wall Street banks to raise their forecasts of net job gains to between 200,000 to 250,000.
Also, average hourly earnings creeped up by 0.5 per cent last month, higher than the expected 0.3 per cent gain, raising the specter of mounting inflation at a time of slower growth.
"This is exactly what the Federal Reserve does not want - lacklustre jobs growth with hourly earnings creeping up significantly. This is putting the Fed in a bind that it probably does not want to be in," said Firas Askari, head of foreign exchange trading at BMO Capital Markets in Toronto.
"It will probably force the Fed to overtighten, and I'm somewhat concerned with the future prospects of the US economy."
The Fed has lifted interest rates, now at 5.25 per cent, 17 straight times since June 2004, and officials have said they are watching closely for signs of higher inflation or increasing inflation expectations.
But Meg Browne, currency strategist at Brown Brothers Harriman in New York, said the jobs and average hourly earnings components of the report, when taken together, do little to change the outlook for the Fed.
"You have jobs a bit lower than expected but slightly higher inflation," she said. "It keeps (Fed expectations) kind of where they were."