NEW YORK, Jan 7 (Reuters) - The dollar rose to its highest in nearly four months against the euro on Friday as a drop in the U.S. unemployment rate helped offset initial disappointment over the weaker-than-expected December payrolls report.
Sentiment on the dollar remained positive despite a smaller-than-forecast number of jobs created, and analysts expect gains to continue the next few weeks. Overall, the data reflected a U.S. economy that was still on a stable growth track.
The greenback initially gave up gains against the euro immediately following the jobs data but recovered to post fresh peaks of nearly four months. Traders said a large order to sell euros against sterling right after the data pressured the euro/dollar pair as well.
Data on Friday showed U.S. non-farm payrolls increased 103,000, below economists' expectations for gains of 175,000 jobs, but unemployment dipped to 9.4 percent, its lowest in more than 1-1/2 years. [ID:nN06134458].
"You can't ignore the fact that, regardless of a disappointing payrolls outcome, U.S. growth is still looking better than Europe and the euro sovereign stress is still there," said Richard Franulovich, senior currency strategist, at Westpac in New York.
The dollar was little changed against a basket of major currencies to 80.769 .DXY, rising as high as 81.087, its strongest level since early December. The index has gained over 2 percent this week, benefiting from a slew of upbeat U.S. data including a report that showed a record number of private sector jobs were created in December.
In the run-up to Friday's employment data, some analysts were expecting job gains as high as 500,000. The actual data, however, prompted investors to cover their short positions on the euro that were built in anticipation of a huge jobs number.
"The headline miss is pretty bad, but the drop in the unemployment rate is the one reason why the dollar has not collapsed completely," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.
"Overall, a very disappointing number that reinforces the idea that we're in for a long, slow jobless recovery. The euro's been in $1.30-$1.35 range for a while, and this number is not enough to break us out of that."
