NEWS / Central Banks

Dollar drops, bonds rally on tepid jobs data

NEW YORK - The dollar slid and government bond prices pushed higher on Friday after U.S. jobs data came in well short of forecasts, suggesting the Federal Reserve may pause its campaign of interest rates increases.

U.S. employers added only 75,000 new workers to their payrolls in May, below the 175,000 expected by economists and the weakest increase since October, when the job market was disrupted by hurricanes. The survey also showed a slim rise in average hourly earnings, signaling muted inflation pressures.

Blue chips slipped as investors worried that that a weaker job market might be an omen of softer corporate profits, and that overshadowed the prospect of an end to rate increases.

"It was a bit of a surprise to see such a drop, and at the same time, only a minimal increase in salaries. It indicates the economy is losing momentum and if things continue like this, it builds the case for a pause by the Fed at the next FOMC meeting," said Michael Metz, chief investment strategist at Oppenheimer Holdings in New York.

The yield on the 10-year note US10YT=RR posted its biggest one-day drop since late 2004, dipping below 5 percent as prices rose 26/32. The yield on the 10-year bond ended below the Fed's current rate target for the first time since early 2001.

The two-year U.S. Treasury note US2YT=RR surged 6/32, with the yield at 4.925 percent.

European government bond futures also rallied, spurred in part by a stronger euro which analysts said reduces the likelihood of a 50 basis point rate hike by the European Central Bank this month. June Bund future FGBLM6> shot to a session high of 116.33 from 115.69 before the U.S. jobs data.

Stocks initially turned higher right after the job numbers, but later pared their gains.

In New York, the Dow Jones industrial average .DJI> was down 12.41 points, or 0.11 percent, at 11,247.87. The Standard & Poor's 500 Index .SPX> was up 2.50 points, or 0.19 percent, at 1,288.21. The Nasdaq Composite Index .IXIC> was down 0.45 points, or 0.02 percent, at 2,219.41.

"Why should investors cheer the fact that profit growth would be slower in the future? How could investors be ebullient about an economy slowing?" asked Michael Pento, senior market strategist at Delta Global Advisors, Inc. in Sarasota, Florida.

The FTSEurofirst300 index of leading shares .FTEU3> ended up just 0.2 percent at 1,313.20 points, after rising as high as 1,325.36.

In the currency market, the dollar was down against a basket of major trading-partner currencies, with the U.S. dollar index .DXY> down 0.88 percent at 84.04 from a previous session close of 84.79.

The euro EUR=> was up 0.87 percent at $1.292 from a previous session close of $1.2809. Against the Japanese yen, the dollar JPY=> was down 0.89 percent at 111.60 from a previous session close of 112.60.

U.S. crude oil futures ended nearly $2 higher on Friday, boosted by supply fears after foreign oil workers were abducted in Nigeria and an Iranian official said the country was determined to go ahead with its nuclear enrichment program.

Production cuts in three Texas refineries after a storm on Thursday heightened supply vulnerabilities just as the Atlantic hurricane season gets under way and helped push energy futures higher.

Crude for July delivery CLN6> settled at $72.33, gaining $1.99, or 2.8 percent, on the New York Mercantile Exchange. A late flurry of buying pushed the contract to a session high of

$72.70.

In London, July Brent crude LCON6> ended up $1.64, or 2.4 percent, at $71.03.

Rising crude oil prices and the weaker dollar helped lift U.S. gold futures from a six-week low.

COMEX Gold for August delivery GCQ6> settled at $641 an ounce, up $7.50, or 1.2 percent, after trading between $624, its lowest since April 21, and $644.