U.S. dollar falls, gold rallies as jobs data spurs Fed hope

NEW YORK Fri Sep 7, 2012 4:23pm EDT

1 of 2. A man passes an electronic board displaying market indices from around the world outside a brokerage in Tokyo August 23, 2012.

Credit: Reuters/Yuriko Nakao

NEW YORK (Reuters) - The U.S. dollar sank against major currencies on Friday and gold prices jumped to a six-month high as anemic American jobs growth fueled investor bets that the Federal Reserve will launch another round of monetary stimulus for the world's biggest economy, perhaps as soon as next week.

Yields on safe-haven U.S. Treasuries slumped on the disappointing August jobs data, while yields on Spanish and Italian government debt extended their slide to multi-month lows after the European Central Bank on Thursday announced plans to combat the region's three-year-old debt crisis by buying sovereign bonds.

The prospects for ECB action supported the euro early in the session, and the currency extended its gains after the U.S. Labor Department reported nonfarm payrolls increased by 96,000 in August, well below forecasts for 125,000 new jobs.

The Federal Reserve starts a two-day policy meeting on Wednesday, and markets will keenly await the U.S. central bank's statement issued on Thursday and a media briefing by Chairman Ben Bernanke.

"This weak employment report, in jobs, wages, hours worked and participation is probably the last piece the Fed needs before launching another round of quantitative easing next week," said Joseph Trevisani, chief market strategist at Worldwide Markets in Woodcliff Lake, New Jersey.

"QE will boost equities, damage the dollar and do little for the economy, but what else can an activist Fed do?"

The U.S. dollar fell 1.0 percent to 80.194 against a basket of major currencies .DXY. The euro touched around a four-month high against the dollar of $1.2814 before paring gains to trade at $1.2810. Against the Swiss franc the common currency rose to its highest level in eight months. U.S. gold futures jumped to $1,740.80, the highest since late February.

U.S. stocks seesawed as investors weighed the chances for more quantitative easing from the Fed, which would pump money into the economy to try to boost growth.

The Dow Jones industrial average .DJI ended up 14.64 points, or 0.11 percent, to 13,306.64. The Standard & Poor's 500 Index .SPX closed up 5.80 points, or 0.40 percent, to 1,437.92. The Nasdaq Composite Index .IXIC gained 0.61 points, or 0.02 percent, to 3,136.42.

"I think the market doesn't really know what to do. What I suspect will happen is, for the rest of today and all through Monday and Tuesday, the market is just going to probably go sideways in anticipation of that FOMC meeting," said Randy Frederick, managing director of active trading and derivatives for Charles Schwab in Austin, Texas.

The benchmark 10-year U.S. Treasury note was up 2/32, the yield at 1.6695 percent, after falling sharply in price on Thursday when news of the ECB plan reduced the need for safe-haven bets.

The FTSEurofirst 300 equity index .FTEU3 closed at 1106.72, up 0.18 percent on the day.

Ten-year Spanish bond yields slid to 5.646 percent, their lowest since early April.

The MSCI world equity index .MIWD00000PUS climbed 1.2 percent to 330.24. The index is back to its level of early May, when demand was still being supported by a massive injection of cheap three-year funds into the banking system by the ECB.

Oil prices rose in volatile trading on expectations of Fed stimulus, even as the weak jobs data dented the outlook for petroleum demand.

U.S. crude settled up 0.93 percent at $96.42 a barrel. Brent October crude rose 76 cents, or 0.67 percent, to settle at $114.25 a barrel.

(Additional reporting by Richard Hubbard in London and Wanfeng Zhou in New York; Editing by James Dalgleish, Leslie Adler and Dan Grebler)

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