By Inyoung Hwang and Oliver Biggadike Feb. 5 (Bloomberg) -- The dollar gained against the yen after a government report showed the U.S. unexpectedly lost jobs last month while the unemployment rate declined. “People are saying the labor market looks a bit weak,” said James Shugg, a senior economist at Westpac Banking Corp. in London. “That’s consistent with this concern that the global economy is going to lose some momentum and budget deficits are going to be a problem and there’s going to be an increase in risk aversion.” The euro traded near an eight-month low against the dollar amid concern widening budget deficits in Greece and other European nations will stifle the region’s economic recovery. The Swiss franc fell from its highest level in 15 months against the euro as traders speculated the nation’s central bank sold the currency to curb its strength. The dollar rose 0.4 percent to 89.43 yen at 10:08 a.m. in New York, from 89.05 yesterday. The euro fell as much as 0.6 percent to $1.3648, the weakest level since May 20, and was at $1.3672 from $1.3723 yesterday. The yen was at 122.28 per euro, from 122.20 yesterday, when it jumped 3.4 percent, the biggest gain since October 2008. Contagion Speculation “It’s a negative surprise,” said Samarjit Shankar, managing director for the foreign-exchange group in Boston at Bank of New York Mellon Corp. the world’s largest custodial bank with more than $20 trillion in assets under administration. “The unemployment rate is a good headline number, but once the dust settles down, I think the overall tone will be down at the end of the day.” The Standard & Poor’s 500 Index declined 0.5 percent after falling 3.1 percent yesterday. The 16-nation European currency is headed for a fourth weekly loss versus the dollar and yen as investors bet rising budget deficits in nations such as Greece, Portugal and Spain will hamper the region’s growth, forcing policy makers to keep interest rates at a record low for longer. The shared currency is down 1.3 percent versus the dollar and 2.2 percent against the yen this week. “It might be that Greece needs some kind of help and that’s precisely what investors are waiting for,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. “The risk is that this becomes even more contagious and it becomes much more expensive to handle this situation. Until there’s a solution, the uncertainty will remain and this will continue to weigh on the euro.” Borrowing Costs Credit-default swaps on the MarkitiTraxx Europe index rose today to the highest level in four months in London. The European Central Bank yesterday left its benchmark rate at a record low of 1 percent and ECB President Jean-Claude Trichet signaled he is in no rush to raise borrowing costs. The economy of the euro area is solid and its budget shortfall will probably be smaller than those of the U.S. and Japan this year, Trichet said. German industrial production fell 2.6 percent in December after gaining 0.7 percent the previous month, the Economy Ministry in Berlin said today. Investors should add to bets that the euro will decline against the dollar, according to Morgan Stanley, which cut its year-end forecast for the currency to $1.24 from $1.32. “Internal strains in the euro area have increased the downside risks” for the currency, the bank said in an e-mailed report yesterday. Swiss Franc The franc reversed earlier gains against the euro on speculation the Swiss National Bank sold the currency to curb gains that threaten deflation. Nicolas Haymoz, a spokesman for the SNB in Zurich, declined to comment on the currency moves. Bettina Eberhard, a spokeswoman for the Bank for International Settlements in Basel, Switzerland, declined to comment. “An initial rally by the Swiss franc triggered aggressive intervention from the SNB,” Societe Generale SA said in a research report today. The franc depreciated to 1.4687 per euro from 1.4642, after trading at 1.4558, the strongest level since Oct. 31, 2008. SNB President Philipp Hildebrand said in an interview with the Wall Street Journal last month that the central bank will continue to “resolutely prevent” any strong gains by the franc to fight deflation. The Group of Seven nations may call upon China to allow its currency to appreciate, when finance ministers and central bankers start a two-day meeting today in Canada. China’s policy makers have limited gains in the yuan since July 2008 as the world economy suffered its deepest downturn since World War II, after allowing the currency to rise 21 percent over the previous three years. U.S. Treasury Secretary Timothy F. Geithner said yesterday Chinese officials realize a more flexible exchange rate is in their economy’s best interest, and he indicated such a shift is “likely.” *T For Related News and Information: Stories on Currencies: NI FRX Stories on Central Banks: NI CEN Carry Trade: FXCT Currency Forecasts: FXFC Developed Market Monitors DMMV Emerging Market Monitors EMMV *T --With assistance from Paul Dobson in London. Editors: Dave Liedtka, Dennis Fitzgerald To contact the reporters on this story: Inyoung Hwang in New York at +1-212-617-7416 or ihwang7@bloomberg.net; Oliver Biggadike in New York at +1-212-617-7188 or obiggadike@bloomberg.net

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