| NEW YORK
NEW YORK The dollar dropped to a near four-month low against the euro on Friday after a smaller-than-expected rise in U.S. jobs for August reinforced the view the Federal Reserve will inject more stimulus into the sluggish economy.
Investors were focused on last month's non-farm payrolls data to gauge whether the Fed will launch another round of bond-buying after its policy meeting next week. The report showed only 96,000 new jobs were added, while economists polled by Reuters had expected 125,000.
"The disappointing U.S. jobs data increases the likelihood of a balance sheet response by the Fed next week," said Marc Chandler, global head of FX strategy at Brown Brothers Harriman in New York.
The euro rose as high as $1.2814 against the dollar, its strongest since late May, knocking out reported option barriers at $1.2660 and $1.2700. It last traded at $1.2811, up 1.4 percent.
On the week, the euro rose 1.8 percent, its largest weekly gain since June. Analysts said the euro's intraday bias remains on the upside and the current rebound should now target the $1.30 psychological level.
The lackluster employment report keeps the pressure on U.S. President Barack Obama ahead of the November election in which the health of the economy looms large. While dollar investors may not have a favored candidate, the uncertainty of the election is beginning to weigh on the currency.
Investors also raised the chances the Fed will keep rates on hold for some time and engage in another round of quantitative easing. Under the program, the Fed prints money to buy bonds, which depresses Treasury yields and encourages investors to seek higher returns elsewhere. An increase in the money supply erodes the value of the dollar.
Following the U.S. jobs report, Nomura Securities said it believes the Fed will announce a new round of quantitative easing late this year and further extend its near-zero interest rate policy to 2015.
The euro was already higher before the U.S. jobs report as investors cheered the European Central Bank's plan announced on Thursday to lower borrowing costs for Spain and Italy.
ECB President Mario Draghi, backing up his promise to do whatever it takes to preserve the euro, unveiled a new and potentially unlimited bond-buying program aimed at lowering painfully high borrowing costs for stressed member states.
Yields on Spanish 10-year government bonds fell below 6 percent for the first time since May, while Italian yields also dropped, lifting the euro across the board.
The euro zone's common currency rose to its highest against the Swiss franc in eight months and last changed hands at 1.2100 francs, up 0.4 percent on the day.
Market speculation that the Swiss National Bank could raise its floor against the euro to 1.22 Swiss francs from 1.20 also prompted hedge funds to unwind bets the euro would fall.
The euro climbed to a two-month high against the yen. By late afternoon trading, the euro rose 0.6 percent to 100.24 yen.
The jobs data also gave a huge boost to the yen. The dollar fell 0.8 percent to 78.24 yen, with the low at 78 yen.
Leading up to the report, the yen had ceded ground against the dollar this week after stronger-than-expected data on U.S. private-sector employment triggered a rise in Treasury yields.
The dollar lost 0.2 percent against the yen, the third straight week of declines.
The U.S. dollar index fell more than 1 percent to 80.191 .DXY, dropping to a four-month low.
"The atmospherics around the dollar have turned aggressively," said Richard Franulovich, senior currency strategist at Westpac Securities in New York.
"The case for a sustainable dollar rally is weak against the backdrop of easier Fed policy and steps by the ECB to address tail risks," he added.
Speculators, however, have shifted to a net long U.S. dollar position this week, from a minor short position previously. <IMM/FX>
The Australian dollar rose 1.1 percent to US$1.0400, adding to Thursday's gains.
A flood of Chinese data on Sunday could provide a challenging backdrop for the Australian dollar, which has retreated over the past month on worries about a slowdown in China, Australia's single biggest export market.
(Additional reporting by Nick Olivari, editing by Dave Zimmerman and Leslie Gevirtz)