* Dollar rises; U.S. payrolls drop smaller than expected
* Dollar index posts biggest 1-day gain in over 5 months
* Euro/dollar has worst day in six weeks
* UK political uncertainty slams sterling (Updates prices, adds details)
By Gertrude Chavez-Dreyfuss
NEW YORK, June 5 (Reuters) - The dollar on Friday posted its largest one-day
gain against a basket of currencies in more than five months after data showed
the United States shed fewer jobs than expected in May, boosting hopes for an
The dollar initially sold off after the jobs report, which showed the U.S.
economy shed 345,000 jobs, well below the 520,000 expected by economists. In the
past, the dollar had fallen in response to data hinting at improvement in the
U.S. economy, with investors moving into riskier assets, including
For story on the jobs report click on [ID:nN05274048].
But the U.S. currency rebounded after initial losses, as investors started to
focus on brightening U.S. economic fundamentals.
"The first 'knee-jerk' reaction was the old 'risk-positive is
dollar-negative' response," said Alan Ruskin, chief international strategist at
RBS Global Banking and Markets in Greenwich, Connecticut.
"The second thought was that the U.S. was leading the positive risk response
and accordingly should not be penalized. The latter logic works on the basis
that a recovery is good news for the dollar's main Achilles heel -- fiscal
In late afternoon trading, the ICE Futures' dollar index, a gauge of the
greenback's value against a basket of six currencies, rose to 80.725 .DXY, up
1.6 percent, its best performance Dec. 19, according to Reuters data.
The dollar index was up 1.8 percent this week, its largest weekly rise since
The euro fell to $1.3963, down 1.6 percent on the day, its worst showing in
about six weeks. It earlier fell to a one-week low on electronic trading
platform EBS at $1.3932 <EUR=EBS> after a knee-jerk jump to $1.4269 after
The dollar rose to nearly one-month highs at 98.90 yen on EBS. It last traded
at 98.88 <JPY=EBS>, up 2.4 percent.
"Today seems to be the first day in a while where the dollar is responding
positively to positive U.S. news," said said Marc Chandler, senior currency
strategist at Brown Brothers Harriman. "That has wrong-footed people."
Sterling was down 1.2 percent against the dollar at $1.5982 <GBP=D4>,
according to Reuters data, after hitting a one-week low of $1.5940.
The euro was down 0.6 percent at 87.42 pence <EURGBP=D4> after rising
to 88.67 pence, a roughly three-week peak.
British Prime Minister Gordon Brown averted the immediate danger of
government collapse on Friday with a cabinet reshuffle that bought the loyalty
of key ministers, but the political uncertainty weighed on sterling.
By backing down from replacing finance minister Alistair Darling, Brown
appeared to have headed off an open revolt by his Labour party for now. But his
authority has been wounded at a time when Britain is in its deepest recession in
60 years and markets and the country are looking for strong government.
Such concerns fed into a market already positioned to take the pound lower
after a steep rally in the past few weeks.
The dollar also gained 1.7 percent against the Swiss franc to 1.0859 francs
<CHF=EBS> on EBS, the biggest one-day advance since May 15. Earlier, the
dollar rose to 1.0908 francs, its highest since May 28. (Additional reporting by
Nick Olivari; Editing by James Dalgleish)