(Recasts; updates prices)
* Dollar rises after U.S. nonfarm payrolls report
* U.S. jobless rate rises to 5.7 percent in July
* Euro zone factory activity contracts in July
By Lucia Mutikani
NEW YORK, Aug 1 (Reuters) - The dollar rose against a
basket of currencies on Friday after better-than-expected U.S.
nonfarm payrolls and manufacturing data for July eased fears of
a deeper pullback in the overall economy.
Analysts said the economic data, coupled with other recent
reports that have also been surprisingly upbeat, provided some
scope for the Federal Reserve to raise interest rates by
year-end or early 2009 to tackle inflation.
In contrast, data from Europe and Australia has generally
pointed to deteriorating economic fundamentals.
"The contrast between Europe and the U.S. is becoming
starker and is more dollar-favorable," said Marc Chandler, head
of global FX strategy at Brown Brothers Harriman in New York.
"We are not out of the woods by any means, but the price
action seems to indicate that many people are more inclined now
to sell euro rallies than to buy dips," he added.
The ICE Futures U.S. dollar index rose as high as 73.527
<.DXY>, building on July's gains, which saw it notch up its
biggest percentage gain since January 2007, according to
Reuters data.
The index, which measures the dollar's performance against
a basket of six currencies, was last up 0.2 percent at 73.339.
The euro was down 0.2 percent at $1.5566 <EUR=>. It dropped
to $1.5514 in overnight trade, its lowest since June 24,
according to Reuters data.
MORE JOBS ELIMINATED
U.S. employers eliminated 51,000 non-farm jobs in July
against market expectations for a payrolls decline of 75,000.
The contraction in payrolls for a seventh straight month,
pushed the U.S. unemployment rate to 5.7 percent from 5.5
percent, its highest level in four years.
"The jobs data do not provide signs of a rebound. At the
same time, they do not validate fears for a deeper pullback in
the economy on the back of energy price gains," said Jim
Galvin, economist at Societe Generale in New York.
Separately, U.S. factory activity was unchanged in July
compared to the previous month, but above market forecasts.
In contrast, euro zone factory activity contracted at its
fastest pace in five years in July, while British manufacturing
shrank at its fastest rate in a decade, reports showed.
In Australia, manufacturing slowed in July to its lowest
level since November 2005.
Analysts said the troubles in the manufacturing sectors
would compel the European Central Bank, the Bank of England and
the Australian central bank to cut interest rates at some
point, narrowing their rate differentials with the United
States.
"Overnight index swaps are showing the market expects the
Fed to raise interest rates by 75 basis points over the next 12
months and the ECB to cut by 7 basis points, this is just a
bias toward a cut, and the BoE to cut by 25 basis points," said
Chandler.
Rising risk aversion on the back of a drop in U.S. and key
European stock markets dragged the dollar lower against the
Japanese yen. A rise in crude oil prices also hurt the dollar
against the yen.
The dollar last traded at 107.54 yen <JPY=>, down 0.3
percent on the day. It earlier fell as low as 107.29 yen.
"Dollar/yen is likely to remain below 108 and any attempts
to do otherwise are likely to remain capped at 108.20," said
Ashraf Laidi, chief strategist at CMC Markets in New York.
Laidi cited the rise in the unemployment rate as one of the
factors hold back U.S. equities from cheering the
smaller-than-expected drop in nonfarm payrolls.
Sterling fell half a percent to 1.9733 <GBP=>, while the
the Australia dollar tumbled as low as US$0.9309 <AUD=>, its
weakest level since May 15, according to Reuters data. It was
last 1.1 percent weaker at US$0.9314.
Speculation is mounting that the Reserve Bank of Australia
could set the tone for lower interest rates after its policy
meeting next week.
The New Zealand dollar tumbled to $0.7247 <NZD=>, a
10-month low, on deepening concerns over the local financial
sector after the country's largest fund manager said it was
suspending activity in one of its funds. The kiwi was last at
US$0.7270, down 0.9 percent on the day.
