Dollar reclaims lost ground after surprise jobs report

The dollar reclaimed much of the ground lost in the wake of last week's US employment data on Tuesday, while the bond market flagged a modest pace of policy tightening from the Federal Reserve this year.

A lacklustre jobs report for March - which undershot expectations by the most since December 2009 - has deepened concerns over the strength of the US economic recovery and led traders to further ratchet back bets on when the Federal Reserve will hike interest rates.

The addition of 126,000 jobs created in March came as a big disappointment for dollar bulls who have benefited from numerous central banks easing policy this year, while the Fed has said the timing of future rate moves would be data dependent.

The reversal in payrolls, after topping the 200,000 level for 12 months in row, was accompanied by a reduction in the pace of expected rate hikes this year.

"The market is pushing expectations for rate hikes into 2016," said Gennadiy Goldberg at TD Securities.

The Fed fund interest rate futures contract settling in January 2016 has fallen from 51 basis points before the jobs data were released to 42.5 bp on Tuesday, indicating that investors now only expect one quarter-point rate hike this year from the current range of zero to 25 bps.

The disappointing non-farm payroll numbers comes after a spate of underwhelming data for the US economy in the first quarter, that has fuelled concerns that the robust growth seen during the second half of 2014 is fading.

Michael Cloherty, head of US rates strategy at RBC Capital Markets, said markets were pricing in only a thin chance of a rate increase in June. Previously, most analysts had seen June as the most likely starting date of the next tightening cycle. Mr Cloherty added that even September's meeting was now a "toss-up", and that RBC analysts were "reviewing" their forecasts.

The immediate market impact of the poor jobs numbers on the dollar and US Treasuries had largely been reversed by Tuesday.

The two-year Treasury yield was marginally lower at 0.51 per cent, down from 0.54 per cent ahead of the non-farm payrolls, while the dollar index rallied sharply from its losses and stood higher than before the jobs data release. The US 10-year Treasury yield climbed to 1.91 per cent, also marginally higher than early Friday.

The euro fell back below its pre-payrolls level - having gained as much as 1.4 per cent to $1.1026 on Friday - it stood at $1.085 on Tuesday, down 1.2 per cent in the subsequent two sessions.

Stephen Jen, a currency hedge fund manager and longtime US dollar bull, argued that the recent blip in US economic data should be ignored. The first quarter of the year "often produces strangely weak data", he wrote in a note to clients this week.

"We had almost exactly the same negative surprise last year, and yet the US economy continued to recover as if nothing had happened . . . In my opinion, there is a high probability that the labour reports will recover sharply next month."

Australia's Reserve Bank held back from an expected rate increase on Tuesday, boosting the country's dollar.

Analysts at Brown Brothers Harriman said the derivatives markets had indicated a 3-1 likelihood of a rate cut. Wrongfooted by the RBA's decision to keep its main rate at 2.25 per cent, those caught on the short side of the Aussie/US trade pushed the Australian currency as much as 1.6 per cent higher to session peak of $0.7710.

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