What a difference a weekend makes.
Investors who initially interpreted weak payrolls as something negative for the U.S. dollar are now pricing in expectations that the Federal Reserve's controversial bond-buying program will buttress economic growth and help support the dollar in the near term.
Last week, traders dumped the greenback en masse following news that employment growth in November fell far short of expectations. But the market reassessed its opinion on Monday, sending the dollar about 1% higher against the euro, after Federal Reserve Chairman Ben Bernanke told an interviewer on CBS' "60 Minutes" program on Sunday that another recession appeared unlikely.
The Fed chief added that the central bank was prepared to increase its $600 billion monetary stimulus plan, if needed.
Bernanke's assertive public relations campaign gave traders added incentive on Monday to give back nearly half the previous U.S. session's gains, amid lingering concerns over Europe's sovereign debt crisis. Analysts said that, at least momentarily, the market was cautiously optimistic the massive infusions of liquidity by the Fed would help support an economic expansion.
"It's all about the market's expectations of future monetary policy...and right now that is going in favor of the U.S.," said Frank Warnock, a professor at the University of Virginia's Darden Business School.
Warnock pointed to data illustrating a tight correlation between the euro/U.S. dollar exchange rate and the yield differential between Germany's two-year bond and comparable U.S. debt. According to Warnock, that difference is a reasonable indicator of the market's expectations of economic growth, which right now favor the United States.
In short, the Fed's monetary easing efforts "absolutely can be dollar-positive if the markets decide that [it is] going to be part of the package that brings about a revival in economic growth," he added.
Traders appeared to agree, as the greenback changed hands above $1.33 against the euro in late U.S. trading, a cent higher than the previous session.
Markets were also preparing for the risk of disappointment from a meeting of euro-zone finance ministers in Brussels, which undermined the euro. Leaders were set to address the need for a financial stabilization fund for the 16-nation currency bloc's distressed economies. Some traders are speculating the package will fall short of what is needed to cushion the euro zone from the reverberations of its debt crisis.
Some economists have suggested the initial pessimism over the Fed's monetary easing might be overdone, considering the global economy is still in the throes of a lurching recovery.
More liquidity "will just sit on the banks' balance sheet as an extra cushion," said Carl Weinberg, chief economist at High Frequency Economics, who dismissed the idea of an inflationary surge, or the creation of a new asset bubble. "The Fed is blamed for everything nowadays, but I don't think it's well-deserved."
Indeed, at least a few analysts said on Monday that the bleak jobs data might be an anomaly in light of other figures that paint a more constructive view of the economy.
"While the jobs report is certainly a stark reminder of just how painfully slow the recovery is likely to be, it is beginning to be seen as somewhat of an outlier, which could be revised upward next month. Upside surprises to recent retail sales, manufacturing, consumer confidence and the ADP employment report suggest that overall economic conditions may be slightly better than Friday's jobs data may suggest," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, in a research note to clients.
-By Javier E. David, Dow Jones Newswires; 212-416-4564; firstname.lastname@example.org