* Dollar rises; U.S. payrolls drop smaller than expected
* Euro/dollar rallies briefly, slips after stops triggered
* Dlr index on pace for largest weekly gain in 2 mths
* UK political uncertainties slam sterling
(Updates prices, adds comment, changes byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, June 5 (Reuters) - The dollar rallied on Friday,
on track for its largest weekly gain in nearly two months
against a currency basket, after data showed the United States
shed fewer jobs than expected, boosting hopes for an economic
recovery.
The dollar initially sold off immediately following the
jobs report, which showed the U.S. economy shed 345,000 jobs in
May, well below the 520,000 expected by economists. In the
past, the dollar had fallen in response to data hinting at
improvement in the U.S. economy, with investors moving into
riskier assets, including higher-yielding currencies.
For the story on the jobs report, click on
[].
But the U.S. currency rebounded after initial losses, as
investors started to focus on improving U.S. economic
fundamentals.
"The first 'knee-jerk' reaction was 'the old',
risk-positive is dollar-negative response," said Alan Ruskin,
chief international strategist at RBS Global Banking and
Markets in Greenwich, Connecticut.
"The second thought was that the U.S. was leading the
positive risk response and accordingly should not be penalized.
The latter logic works on the basis that a recovery is good
news for the dollar's main Achilles heel -- fiscal financing."
In early afternoon trading, the ICE Futures' dollar index,
a gauge of the greenback's value against a basket of six
currencies, rose to 80.522 <.DXY>, up 1.3 percent. Its weekly
gain was 1.6 percent, on pace for its largest weekly rise
since April 12, according to Reuters data.
The dollar rose to nearly one-month highs at 98.33 yen on
electronic trading platform EBS. It last traded at 98.24
<JPY=EBS>, up 1.7 percent on the day.
The euro was last trading at $1.3989, down 1.4 percent on
the day. It earlier fell to a one-week low on EBS at $1.3970
<EUR=EBS>, after a knee-jerk jump to $1.4269 after the data.
"Today seems to be the first day in a while where the
dollar is responding positively to positive U.S. news," said
said Marc Chandler, senior currency strategist at Brown
Brothers Harriman. "That has wrong-footed people."
Sterling was down 1.2 percent against the dollar at $1.5993
<GBP=D4>, according to Reuters data, after hitting a one-week
low of $1.5959.
The euro was down 0.4 percent at 87.45 pence <EURGBP=D4>,
after rising to 88.67 pence, a roughly three-week peak.
British Prime Minister Gordon Brown averted the immediate
danger of government collapse on Friday with a cabinet
reshuffle that bought the loyalty of key ministers, but the
political uncertainty weighed on sterling.
By backing down from replacing finance minister Alistair
Darling, Brown appeared to have headed off an open revolt by
his Labour party for now. But his authority has been wounded at
a time when Britain is in its deepest recession in 60 years and
markets and the country are looking for strong government.
Such concerns fed into a market already positioned to take
the pound lower after a steep rally in the past few weeks.
The dollar also gained 1.7 percent against the Swiss franc
to 1.0860 francs <CHF=EBS> on EBS, the biggest once day advance
since May 15.
(Additional reporting by Nick Olivari; Editing by Diane
Craft)
