FOREX-U.S. dollar drifts higher after May jobs report

Reuters

(Updates trading, adds comments)

* U.S. dollar in narrow range after solid jobs data

* Markets digest data, ECB's moves to loosen policy

* Euro still seen vulnerable amid policy divergence

By Daniel Bases

NEW YORK, June 6 (Reuters) - The U.S. dollar recouped losses Friday as investors added to a well-worn pattern of borrowing greenbacks to buy higher-yielding currencies after solid U.S. jobs data left little chance the Federal Reserve would speed up monetary tightening.

This follows Thursday's long-promised steps by the European Central Bank to boost the level of monetary stimulus into the euro zone economy, which, over time, puts pressure on investors to sell euros and buy higher-yielding currencies.

"One central bank providing liquidity and another seeing data that is not going to change its mind on removing liquidity or the pace of normalization leads to an environment where risk is back on the table for the carry trade. That also benefits emerging market currencies," said Steven Englander, global head of G10 FX strategy at CitiFX in New York.

The euro gyrated after the data, initially selling off but then catapulting to a fresh, but brief, two-week high of $1.3677. Since then, it has settled back down 0.18 percent at $1.3635.

The data, which showed the U.S. economy added 217,000 non-farm jobs against the Reuters consensus forecast of 218,000, brought employment to its pre-recession levels and indicated an economy that had snapped back from a harsh winter.

It may take until next week for the dust to settle on the ECB's moves, making good on hints that it would take strong action to both support the economy and, in passing, halt gains for the euro which have driven inflation below targets.

"Nothing really has changed in the U.S. scenario and I don't think the dust has settled from the ECB. The fact is the euro is lower than when we wholly anticipated the easing (by the ECB)," said Robert Lynch, head of G10 FX strategy at HSBC in New York.

Since the May 8 ECB policy meeting when expectations grew for the central bank to loosen policy, the euro has dropped nearly 2 percent against the dollar and it is now down 0.80 percent year-to-date.

Investors had been caught by the euro's four percent rise between January and the start of May, an unexpected scenario given bets the removal of policy accommodation by the Fed was expected to boost the dollar.

But the Fed's slow and steady message of a dovish outlook for monetary policy remains intact despite stronger data.

The conclusion of many from Thursday's ECB decision is that the ECB on its own will struggle to weaken the single currency.

"It is still all about the Fed," said one London-based dealer. "Until we get more certainty about the prospect of stronger growth and higher interest rates in the United States, there are too many other factors in the euro's favour."

Trading ranges were narrow elsewhere. The dollar rose 0.15 percent to 102.53 yen. The euro was off 0.05 percent at 139.82 yen.

(Additional reporting by Patrick Graham in London; Editing by Catherine Evans, Meredith Mazzilli and Bernadette Baum)

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