* Pace of U.S. job losses slows, boosts recovery hopes
* Dollar hits highest versus yen since mid-June
* Dollar also gains on euro, reversing recent trend
* Markets pricing in tighter Fed policy by mid-2010
(Updates prices, adds comment, changes byline)
By Steven C. Johnson
NEW YORK, Aug 7 (Reuters) - The dollar vaulted higher on
Friday as data showed the pace of U.S. job losses slowed last
month, adding to recent evidence that the health of the world's
largest economy is starting to improve.
The U.S. currency rose more than 2 percent against the yen
to its best level since June and was on track for its biggest
daily gain against Japan's currency in nearly six months.
Crucially, it also surged against the euro, bucking a
recent trend in which the dollar tended to fall on good news as
investors shunned it for higher-yield, higher-risk currencies
and assets such as commodities and stocks.
Friday's data showing employers cut 247,000 jobs in July,
far fewer than the 467,000 positions lost in June, added to a
batch of strong data that suggested the U.S. economy will
recover before other economies, eventually leading to higher
interest rates and boosting the value of dollar assets.
"This is a sign that the currency markets are weaning
themselves from 'the-good-news-is-bad-news for the dollar'
syndrome and returning to fundamental measures of economic
growth and interest rate cycles," said Joseph Trevisani, chief
market analyst at FX Solutions in Saddle River, New Jersey.
The dollar soared 2.3 percent to 97.53 yen <JPY=>, its
highest level since mid-June, while the euro fell 1.1 percent
to $1.4187 <EUR=>, well off a session peak of $1.4414. The euro
hit $1.4446 earlier this week, its best level since December.
Sterling fell 0.5 percent to $1.6689 <GBP=>, retreating
further from a 10-month high above $1.70 reached this week. The
greenback rose 1.5 percent to 1.0812 Swiss francs <CHF=>.
EYES ON THE FED
July's data showed the smallest monthly job losses since
last August and the first decline in the unemployment rate --
from 9.6 percent to 9.4 percent -- since April, 2008.
"We've seen improvement in housing, in manufacturing output
and now clearly in the job environment," said Greg Salvaggio,
vice president at Tempus Consulting in Washington, D.C.
"You add this up and it will lead to dollar gains as we
think the U.S. will emerge more quickly from recession."
Long-dated interest rate spreads between the United States
and euro zone moved in the dollar's favor and fed funds futures
were pricing in a benchmark U.S. interest rate, currently near
zero, of 1.25 percent by mid-2010, the highest since June.
Bets on a Fed rate hike by year end jumped as high as 46
percent from 34 percent before the jobs data.
Alan Ruskin, chief international strategist at RBS
Securities in Greenwich, Connecticut, said that "looks
premature" but added that "the idea of selling the USD on
strong US data because it is risk positive is being
appropriately challenged."
Last month, Fed Chairman Ben Bernanke assured markets the
Fed -- the U.S. central bank -- could exit from its super-loose
monetary policy should conditions warrant but also said he
expected rates to remain low well into 2010.
The Fed will have another chance to chime in at a meeting
next week, and some strategists said it may not be quite as
ready to call an end to the recession as markets appear to be.
"The market's probably running a bit ahead of the Fed,"
said Adam Boyton, senior currency strategist at Deutsche Bank
in New York. "We've had one good GDP report, one manufacturing
report and one jobs report, and I don't think that's enough."
(Additional reporting by Vivianne Rodrigues; Editing by James
Dalgleish)
