By Angela Moon
NEW YORK, Jan 13 (Reuters) - The U.S. dollar dropped to its lowest in four weeks against the yen on Monday and bond yields fell to a three-week low after last week's soft U.S. jobs data dampened optimism about the outlook for the world's largest economy.
A measure of world stock markets was also lower, weighed by a broad decline on Wall Street on growing caution ahead of an onslaught of corporate results. Negative pre-announcements have been piling up, leaving a lackluster profit growth outlook.
The greenback fell to its weakest against the yen since Dec. 18, to 102.86 yen. It was last down 1.17 percent at 102.89 yen .
"Dollar/yen is having a clear aftershock reaction to the very weak (nonfarm payroll) number, because the number reset expectations across all markets - including interest rate markets, which are very important to dollar/yen," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
The dollar continued its slide against the yen after Dennis Lockhart, President of the Federal Reserve Bank of Atlanta, highlighted concern about the still struggling U.S. labor market. He cautiously endorsed further cuts to the stimulative program, warning that the labor market has not yet healed and that there are worrisome signs of disinflation in the economy.
Meanwhile, U.S. Treasuries prices rose, with the yield on the benchmark 10-year note falling to a three-week low after registering the largest one-day fall since October on Friday on news U.S. employers added only 74,000 workers in December, far short of the 196,000 rise forecast by analysts polled by Reuters.
Benchmark 10-year notes rose 9/32 in price to yield 2.8248 percent, down from a high of 2.967 percent on Friday.
Thirty-year bonds rose 12/32 in price to yield 3.7775 percent, down from Friday's high of 3.891 percent.
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 benchmark 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.
U.S. stocks ended lower on Monday on concerns that stocks may have become expensive after the benchmark S&P 500 hit its highest in nearly seven years.
Wall Street has seen a slow start to the year following a gangbusters 2013. After the S&P 500's jump of almost 30 percent last year, its forward price-to-earnings ratio is the highest in nearly seven years and investors are weighing the risk of paying such a premium for earnings that may see growth stall.
Almost 10 out of 11 earnings pre-announcements from S&P 500 companies lowered estimates, according to Thomson Reuters data.
"People have moved to the sidelines waiting for earnings to get a little more clarity," said Michael O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.
"Fundamentals are going to have to support gains in the future," he said, pointing to the gradual decline in the stimulus from the Federal Reserve that has pushed U.S. equities as an asset class higher.
On Wall Street, the Dow Jones industrial average was down 179.11 points, or 1.09 percent, at 16,257.94. The Standard & Poor's 500 Index was down 23.17 points, or 1.26 percent, at 1,819.20. The Nasdaq Composite Index was down 61.36 points, or 1.47 percent, at 4,113.30.
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.
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 0.5 percent while emerging stocks were up 0.8 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, oil fell after news of a deal between Western nations and Iran to curb the OPEC country's nuclear program and as production resumed from Libya and a key North Sea oilfield.
Brent crude for February delivery ended the session 50 cents lower at $106.75 per barrel, after settling 86 cents higher on Friday. U.S. crude slipped 92 cents to settle at $91.80, after closing $1.06 higher in the previous session.