NEW YORK -- The dollar rallied sharply as a mix of technical positioning, solid U.S. jobs data and the U.S. Treasury Secretary's remarks on the Chinese yuan led to volatile trade.
A report showing the economy added 130,000 jobs last month initially boosted the dollar against the euro, but it quickly gave up those moves amid a flurry of euro buying and data showing U.S. consumer sentiment sagged in December.
But the market turned yet again, and dollar buying picked up when U.S. Treasury Secretary Henry Paulson told CNBC that China needs more foreign exchange flexibility.
Although Paulson was calling for a stronger yuan, "people interpreted (his) comments as being somewhat more bullish to the dollar," said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington, D.C.
Midafternoon, the dollar was up 1 percent at 116.30 yen , just off a session peak at 116.51, according to EBS.
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The euro, which had climbed as high as $1.3364 earlier, had since reversed course and was down half a percent on the day at $1.3221 and on track for its largest daily drop in two months.
Traders also cited speculation that the European Central Bank was in the market checking the rise of the euro -- with one dealer even mentioning $1.3360 as the level in question -- but an ECB spokesman declined to comment.
Such talk "is hard to prove, but it definitely adds to volatility," Salvaggio said.
Traders said volatility was indeed the order of the day, and added that some of the occasionally counter-intuitive price action could be chalked up to speculative positioning.
"I think there were some not-so-friendly accounts out there today, some very aggressive intraday traders and fast money players getting involved," one dealer said.
The dollar had come into the session under a thick cloud that began to accumulate two weeks ago and has since pushed the euro to 20-month highs around $1.3370.
Dollar weakness has been tied to views that slower U.S. growth is likely to push the Federal Reserve to cut interest rates in early 2007 even as the ECB and other central banks push rates higher, thus eroding the dollar's yield advantage.
Analysts said the pervasive negative sentiment, coupled with year-end position squaring, was keeping the greenback under pressure and helped explain its rather modest initial gains on Friday following better-than-expected jobs data.
"The foreign exchange market is still leaning toward a softening economy," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida.
A decline in the University of Michigan's consumer sentiment index for December didn't help, he said.
But the yen selling was also a theme on Friday, sparked overnight after a report showed the Japanese economy grew by 0.2 percent in the July-September period, below an initial reading of 0.5 percent.
That cast some doubt on whether Japanese rates will raise from their current 0.25 percent before year end. The euro rose 0.45 percent to 153.76 yen
Elsewhere, sterling was down half a percent at $1.9546, as the dollar rally continued to chip away at a move that took the pound above $1.98 last week for the first time in 14 years.
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