By Angela Moon
NEW YORK Jan 13 The U.S. dollar dropped to its lowest level in four weeks against the yen and Treasuries prices rose on Monday, extending Friday's rally as investors reduced bullish expectations for economic growth after the weak December jobs report.
A measure of world stock markets reversed early gains to trade lower as major U.S. stock indexes fell to session lows, with the 10 S&P 500 industry groups posting losses in widespread selling.
The dollar hit a six-week trough against the yen, falling to 102.97, its lowest level since Dec. 18.
Dollar/yen was one of the strongest-performing major currency pairs last year and many hedge funds have been betting the trend will continue as the Fed cuts back its huge bond-buying program, even as the Bank of Japan continues to provide even more stimulus this year.
In U.S. Treasuries trading, the yield on the benchmark 10-year note fell to a three-week low after registering the largest one-day fall since October on Friday.
Benchmark 10-year notes rose 8/32 in price to yield 2.8285 percent, down from a high of 2.967 percent on Friday. Thirty-year bonds rose 13/32 in price to yield 3.7775 percent, down from Friday's high of 3.891 percent.
The implied yields on Fed funds futures also tumbled as markets pushed back the timing of the Federal Reserve's first interest rate hike out toward late-2015 from mid-2015. Investors were also looking for direction with Japanese financial markets closed on Monday for a public holiday.
"The market is taking its leads from U.S. Treasury markets, which are generally weighing on the dollar across the board," said Adam Cole, global head of FX strategy at RBC Capital Markets.
The lower-than-expected jobs gain is not yet seen as likely to alter the Fed from its course of reducing bond purchases, which were cut by $10 billion to $75 billion a month and are seen as likely to be pared further over coming months.
But speculation over when the Fed is likely to begin raising interest rates from rock-bottom levels is likely to keep short- and intermediate-dated debt volatile, with expectations for a rate hike varying from mid-2015 to 2016.
The president of the Atlanta Federal Reserve Bank, Dennis Lockhart, cautiously endorsed further cuts to the stimulative program on Monday, warning that the labor market has not yet healed and that there are worrisome signs of disinflation in the economy.
He said in a speech "very accommodative" monetary policy remains appropriate despite his predictions for a pick-up in economic growth and a gradual rise in inflation this year.
Wall Street kicked off a week full of corporate earnings reports on a cautious note on growing concerns that stocks may have become expensive after the benchmark S&P 500 hit its highest level in nearly seven years. The index surged almost 30 percent in 2013.
"People are sitting on their hands, waiting for major results to figure out how strong this season may be," said Douglas DePietro, managing director at Evercore Partners in New York.
The Dow Jones industrial average was down 122.29 points, or 0.74 percent, at 16,314.76. The Standard & Poor's 500 Index was down 15.98 points, or 0.87 percent, at 1,826.39. The Nasdaq Composite Index was down 40.72 points, or 0.98 percent, at 4,133.94.
Investors will keep an eye on fourth-quarter earnings, with major U.S. banks, including JPMorgan, Citigroup and Goldman Sachs, announcing results this week. European earnings will gather pace in the last week of the month.
According to Thomson Reuters data, fourth-quarter profits are expected to grow 7.3 percent over the year-ago period. However, the 9.8 ratio of negative guidance to positive outlooks is currently the largest on record.
In Europe, banking shares rallied after regulators agreed to soften new leverage ratios for banks. The STOXX bank index rose 1.5 percent, extending its gains this year to almost 6 percent.
MSCI's world equity index was down 0.2 percent while emerging stocks were up 0.7 percent.
The FTSEurofirst 300 index of top European shares rose 0.3 percent to 1,324.42, while the euro zone's blue-chip Euro STOXX 50 index was up 0.3 percent at 3,111.94, both just a few points below five-year highs hit recently.
In commodity markets, Brent oil fell slightly below $107 a barrel as the market absorbed news of a deal between Western nations and Iran to curb its nuclear program and the resumption of production from a key North Sea oilfield.
U.S. oil fell more than $1, then pared some losses, though it was pressured by poor the U.S. jobs data.
Brent crude for February delivery was off 50 cents to $106.75 per barrel while U.S. crude fell 93 cents to $91.79 per barrel.