U.S. Markets

Dollar rises to three-week high on Fed official comments, jobs data

NEW YORK (Reuters) - The dollar rose to three-week highs on Friday after an influential Federal Reserve official said the U.S. central bank’s plan to shrink its bond portfolio this year would not significantly delay its interest rate-hiking cycle.

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The greenback initially sold off on a softer-than-expected U.S. jobs report for March, but rebounded as analysts noted the apparent weakness was caused by snowstorms.

Safe-haven buying also supported the dollar as the market focused on geopolitical events after the United States launched cruise missiles at an airbase in Syria, an ally of Russia.

New York Fed President William Dudley, an advocate of low interest rates, said on Friday that shrinking the Fed’s $4.5 trillion bond portfolio would prompt only a “little pause” in the Fed’s rate hike plans, providing relief to dollar bulls banking on more than one rate increase this year.

He added that interest rates are still a primary tool for monetary policy, and not a “gradual” balance sheet reduction.

“Dudley’s comments added a tailwind for the dollar,” said Joe Manimbo, senior market analyst at Western Union Business in Washington. “He has softened any suggestion that any reduction in balance sheet would cause a pause in interest rate hikes in a meaningful way.”

The New York Fed official had said in an interview last week that trimming the balance sheet was a substitute for rate hikes, which could prompt the Fed to “pause” raising rates at that time.

Investors still expect two more rate increases in 2017, analysts said, although the probability of a June hike has declined to 61 percent FFM7 after the jobs report from more than 70 percent late on Thursday.

The dollar index rose to three-week peaks of 101.26 .DXY and last traded a up 0.5 percent at 101.16.

The dollar touched session highs against the Japanese yen following Dudley's comments, and was last up 0.3 percent at 111.16 JPY=

The greenback hit a four-week high versus the euro, which fell 0.5 percent to $1.0587 EUR=.

The dollar’s early rebound was spurred by a report showed U.S. non-farm payrolls increased by 98,000 jobs last month, the fewest since last May and far short of the increase of 180,000 jobs expected by a Reuters poll of economists.

The unemployment rate declined to 4.5 percent from 4.7 percent in February.

Reporting by Gertrude Chavez-Dreyfuss; Editing by Meredith Mazzilli and Richard Chang