US recap: Dollar gains on jobs beat outdone by risk-on flows

May 5 (Reuters) – The dollar index was down 0.1% afternoon trade on Friday, surrendering an initial bounce that followed seemingly stellar US jobs data as waning US banking concerns diverted recent risk-off flows away from the safe-haven US currency.

The recovery in Treasury yields in response to the employment data was limited a bit because March and February payrolls were revised down by 149k versus April’s 73k forecast beat.

But the unexpected jobless rate drops to a 44-year low and unforeseen rise in average hourly earnings sent 2-year Treasury yields up 20bp, erasing Thursday’s post-Fed and banking stress plunge.

Even with 2-year bund-Treasury yields spreads falling over 20bp, aided by euro zone March retail sales and industrial production’s unexpected plunges, EUR/USD recovered to a modest gain as the tide went out on dollar buying.

Worst off was the top haven yen, with USD/JPY up 0.39%, and EUR/JPY up 0.54%, as the more risk-sensitive and GBP/JPY and AUD/JPY surged 0.9% and 1.28%.

USD/JPY’s recovery high was capped by the 38.2% Fibo of this week’s 3% risk-off slide. To extend Friday’s rates and risk-driven rally prices will likely need more US data support and the nascent recovery in banks stocks to continue.

Weekly Fed data out Thursday showed less stress, not more, in the banking system, while officials assess possible market manipulation related the recent seemingly indiscriminate selling or shorting in regional bank shares.

Risk-sensitive sterling quickly shook off the stronger-than-forecast US jobs data pullback to make fresh one-year highs with a 0.5% rise.

EUR/GBP fell 0.45%. The BoE is further behind the inflation curve than the ECB, with its current 4.25% rate priced to rise to 4.82% by September, while the ECB rate at 3.25% is seen peaking at 3.55% in September.

Next week’s key events are US CPI on Wednesday and the BoE meeting on Thursday.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)