U.S. labor data weigh on dollar, Treasury yields

NEW YORK (Reuters) - The dollar fell and benchmark U.S. Treasury yields touched multi-week lows on Friday as an unexpectedly weak government reading of American labor costs dulled prospects for higher U.S. interest rates.

U.S. one hundred dollar notes are seen in this picture illustration taken in Seoul February 7, 2011. REUTERS/Lee Jae-Won

Wall Street stock prices closed down, after surrendering early gains from the Employment Cost Index data showing the smallest quarterly increase in 33 years. Oil prices declined by 2 to 3 percent on growing worries about global oversupply.

The dollar index .DXY fell well over 1 percent before recovering for smaller losses of 0.35 percent. The euro was especially strong and was last up 0.50 percent against the dollar at $1.0984, after trading over $1.11.

Treasuries prices rallied, with yields on benchmark 10-year Treasury notes US10YT=RR falling to a three-week low of 2.184 percent. The price was last up 22/32 of a point to yield 2.187 percent.

The 30-year Treasury bond US30YT=RR yield fell to a fresh two-month low of 2.9040 percent from 2.9390 percent prior to the data. The price was last up 28/32 of a point to yield 2.9093 percent.

The Employment Cost Index, the broadest measure of labor costs, rose just 0.2 percent last quarter, the U.S. Labor Department reported. Economists had forecast a 0.6 percent rise in the report, which followed a GDP report widely seen as allowing the Federal Reserve to start hiking rates as early as September.

“The magnitude of the miss was definitely a bit of a surprise, especially as people were really gearing up for a September (rate) hike. This definitely puts a lower probability on that,” said Stanley Sun, interest rate strategist at Nomura Securities International in New York.

Wall Street's Dow Jones industrial average .DJI fell 51.78 points, or 0.29 percent, to 17,694.2, the S&P 500 .SPX lost 4.24 points, or 0.2 percent, to 2,104.39, and the Nasdaq Composite .IXIC dropped 0.50 points, or 0.01 percent, to 5,128.28.

Drops in energy stocks eclipsed the labor data, which bolstered expectations on Wall Street that the Fed could delay a rate hike this year. Exxon Mobil XOM.N shares dropped 4.58 percent, while Chevron CVX.N lost 4.89 percent after reporting poor quarterly earnings due to weak oil prices.

European shares .FTEU3 edged up 0.1 percent on merger hopes and good earnings and finished July with a 4 percent monthly rise as worries receded about the future of Greece's membership in the euro zone.

China's CSI300 index .CSI300 ended flat after a late dip to leave it down 14.7 percent on the month. The Shanghai Composite Index .SSEC lost 1 percent, extending its July losses to 13.4 percent despite support measures by the country's authorities.

Crude oil also slipped for a second session at the end of its worst month of losses since the 2008 financial crisis. U.S. crude CLc1 settled down $1.40, or almost 3 percent, at $47.32 a barrel. It slid more than 2 percent on the week.

Through July, U.S. crude was down 21 percent, its largest monthly decline since October 2008.

Brent LCOc1 settled down $1.10, or 2 percent, at $52.21 a barrel. It lost 5 percent on the week and 18 percent on the month.

Additional Reporting By Daniel Bases in New York; Editing by Nick Zieminski and Meredith Mazzilli