| NEW YORK
NEW YORK The dollar dropped across the board on Tuesday, hitting its lowest against the euro in nearly two years, as disappointing U.S. jobs data emboldened expectations the Federal Reserve will continue its easy money policy for the rest of the year.
The greenback hit an eight-month trough against a basket of currencies after data showed U.S. employers added far fewer workers than expected in September, suggesting a loss of momentum in the economy.
The data will likely add to the Fed's caution in deciding when to trim its bond purchases. The Fed's bond buying is negative for the dollar as it is tantamount to printing money.
The dollar also swooned against the safe-haven Swiss franc and higher-yielding Australian dollar, dropping to a 20-month trough and a 4-1/2-month low, respectively.
U.S. nonfarm payrolls increased by 148,000 workers last month, the Labor Department said. While the job count for August was raised, employment gains in July were revised lower and were the weakest since June 2012.
Economists were expecting U.S. job gains of 180,000 in September, which preceded the 16-day government partial shutdown in October. With the shutdown expected to have damaged the U.S. economy, the conviction that the Fed will not reduce its asset buying anytime soon became even more entrenched.
"Is the Fed getting tired of being right? Today's underperforming jobs number fully justifies September's cautious FOMC," said Joseph Trevisani, chief market strategist at WorldWideMarkets in Woodcliff Lake, New Jersey.
"Full-bore quantitative easing will probably be with us through the first quarter and speculation for an increase (in QE) may be no further than another weak payroll."
Most U.S. primary dealers polled by Reuters on Tuesday believe the Fed will not start cutting bond purchases until March of next year and said the recent government shutdown and standoff over raising the U.S. debt ceiling had a significant impact on the Fed's timing.
In afternoon trading, the euro hit a high of $1.3792 against the dollar, its strongest level since mid-November 2011. It was last at $1.3782, up 0.7 percent on the day.
The dollar index, a gauge of the dollar's value against six major currencies that is dominated by the euro, fell to its weakest in eight months at 79.182. The index last traded at 79.234 .DXY, down 0.6 percent.
The unemployment rate did dip to 7.2 percent last month, the lowest since November 2008, but the expected toll of the government shutdown on the economy eclipsed any signs of strength.
Economists estimated that the government shutdown shaved as much as 0.6 percentage point off annualized fourth-quarter gross domestic product growth through reduced government output and damage to both consumer and business confidence.
The labor participation rate in September held fast at a 35-year low, unchanged at 63.2 percent.
"A 35-year low in the participation rate indicates that the recent improvement in the unemployment rate has been influenced in no small way by discouraged workers leaving the labor force," said Michael Woolfolk, global market strategist at BNY Mellon in New York. "This report clearly reduces the likelihood of tapering."
Against the yen, the dollar fell as low as 97.86 yen. It last traded at 98.12 yen, down 0.1 percent on the day.
Following the September jobs report, futures prices suggested that the Fed will raise interest rates no earlier than April 2015, giving a 54 percent probability of an increase that month, according to CME Group's Fed Watch. Fed Watch generates probabilities based on the price of Fed funds futures traded at CME Group Inc's (CME.O) Chicago Board of Trade.
Before the report, traders were giving a 59 percent probability for an April 2015 rate rise.
Against the Swiss franc the U.S. dollar hit a 20-month low of 0.8937 franc. It was last at 0.8948 franc, down 0.8 percent.
The Australian dollar climbed to a 4-1/2-month peak against the greenback at US$0.9730. It has retraced half of its April-to-August fall. It was last at US$0.9708, down 0.6 percent, according to Reuters data..
(Additional reporting by Gertrude Chavez-Dreyfuss and Nick Olivari in New York and Ann Saphir in Chicago; Editing by Nick Zieminski)