The dollar fell against the euro and the yen on Friday as weak signals on the U.S. labour market lessened expectations that the Federal Reserve would start reducing its bond purchases in the near term.
The Labour Department reported that U.S. employers slowed their pace of hiring in July, data that could make the Fed more cautious about scaling back its monthly $85 billion bond-buying program, even though the jobless rate fell to a 4-1/2-year low.
After a string of better-than-expected data this past week that had buoyed optimism about economic growth in the second half of the year, the tepid jobs data served as a reminder that the recovery faces headwinds.
Expectations that the U.S. central bank may start winding down its monetary stimulus program as early as September have buoyed the dollar this year, but those hopes have faded a bit in recent weeks, and the Fed on Wednesday offered no indication of a near-term move at the end of a two-day policy meeting.
Less stimulus could prod a rise in interest rates, potentially making the dollar more attractive for investors.
"Any misconceptions that the Fed was looking to taper in September have been blown out of the water today after the nonfarm payrolls number disappoints to the n'th degree," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York.
"The U.S. economy remains on a shaky foundation in terms of both GDP and employment. Until the foundation is strengthened, the Fed will be forced to continue its easing bias."
U.S. employers added 162,000 jobs in July, which was below the median forecast in a Reuters poll of 184,000. The jobless rate fell to 7.4 percent.
In late afternoon trade, the euro rose 0.6 percent to $1.3278, having hit a session peak of $1.3294, according to Reuters data.
Against the yen, the dollar shed 0.6 percent, to 98.98 yen, having fallen as low as 98.65 yen.
The July jobs report was in contract to Thursday's data on jobless claims and manufacturing data that showed the world's largest economy was recovering steadily. The robust data had pushed U.S. yields higher and widened the gap over German, British and Japanese bonds, and buoyed the dollar.
"This disappointing payroll number will undo some of the positive market momentum on the economy and the dollar from yesterday's strong ISM and jobless claims reports and justify the Fed's caution on quantitative easing," said Joseph Trevisani, chief market strategist at WorldWideMarkets, in Woodcliff Lake in New Jersey.
On Friday, St. Louis Fed President James Bullard said he believed the U.S. central bank should be careful about basing its decisions on forecasts and that policymakers should wait to see more data before deciding to taper bond purchases.
Bullard told reporters that the drop in the U.S. unemployment rate takes the nation closer to a 7 percent threshold outlined by Fed Chairman Ben Bernanke as the point around which the central bank would likely end bond purchases.
Traders of short-term U.S. interest-rate futures boosted bets that the Fed will wait until 2015 before raising short-term borrowing costs after the jobs data.
Other data on Friday showed a slight gathering of inflationary pressure, with the 12-month reading of the Commerce Department's gauge of core inflation rising to 1.2 percent in June from 1.1 percent a month earlier.
That could allay some concerns at the Fed that extremely low inflation could hurt the economy by giving consumers more reason to put off purchases.
"Taken together, we believe today's employment report was not game-changing enough to alter the Fed from our call whereby they could begin to taper QE at their next meeting on September 18," said Chris Tevere, senior currency strategist at Forex.com in New York.
"Of course this is barring an utterly disappointing August jobs number on September 6 of sub-125,000 in job growth," he said.
The dollar index, which measures the greenback versus a basket of currencies, fell 0.5 percent to 81.938.
Despite the pullback on Friday, Jens Nordvig, global head of currency strategy at Nomura bank, said his firm maintains a long U.S. dollar basis but said the market probably needs to see stronger data before the strong dollar trade really takes off.
Currency speculators decreased their bets in favour of the U.S. dollar in the latest week, according to data from the Commodity Futures Trading Commission released on Friday.
The value of the dollar's net long position fell to $24.45 billion in the week ended July 30, from $28.69 billion the previous week.
(Additional reporting by Wanfeng Zhou; Editing by Leslie Adler)