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FOREX-Dollar jumps as U.S. employers add more jobs than expected in January

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By Karen Brettell

NEW YORK, Feb 3 (Reuters) - The dollar jumped on Friday after data showed that U.S. employers added significantly more jobs in January than economists expected, potentially giving the Federal Reserve more leeway to keep hiking interest rates.

The Labor Department's closely watched employment report showed that nonfarm payrolls surged by 517,000 jobs last month. Data for December was revised higher to show 260,000 jobs added instead of the previously reported 223,000.

Average hourly earnings rose 0.3% after gaining 0.4% in December. That lowered the year-on-year increase in wages to 4.4% from 4.8% in December. Economists polled by Reuters had forecast a gain of 185,000 jobs and a 4.3% year-on-year jump in wages.

The surprisingly strong payrolls number reversed a move from Wednesday, when traders raised bets that the U.S. central bank would stop hiking borrowing costs after a widely expected 25-basis-point increase in March.

"After the Fed meeting it looked like markets had the advantage - it was still pricing in a rate cut, they took interest rates down, and they took the dollar down, and now I think 48 hours later the Fed looks like they might have the upper hand again," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

The U.S. central bank on Wednesday raised rates by 25 basis points and said it had turned a key corner in the fight against high inflation, leading investors to price in a more dovish path going forward.

Fed officials in December said they expected to raise the central bank's benchmark overnight interest rate above 5% and they have stressed they will need to hold it in restrictive territory for a period of time in order to sustainably bring down inflation.

But traders have bet that the rate will peak below 5% and that the Fed will cut rates in the second half of the year as the economy slows.

Traders are now pricing in the Fed's policy rate to peak at 4.98% in June, up from 4.88% on Thursday afternoon.

The dollar was last up 0.72% at 102.51 on the day against a basket of currencies. The euro fell 0.57% to $1.08490. The dollar gained 1.29% against the Japanese yen to 130.39. (Reporting by Karen Brettell; Editing by Kirsten Donovan and Paul Simao)