Dollar gains vs yen after U.S. jobs, manufacturing data

NEW YORK (Reuters) - The dollar rose against the yen on Friday, posting its largest one-day gain in roughly a month, after January data showing the biggest number of U.S. jobs created in 11 months and a rebound in U.S. manufacturing.

But tame wage inflation as shown in the U.S. nonfarm payrolls report kept the dollar's gains in check, analysts said.

"The combination of a barnstorming headline number and the slight rise in unemployment suggests two things: America is creating jobs at a prodigious rate right now and there is some spare capacity to keep employers fed with more recruits in coming months," said David Lamb, head of dealing at Fexco Corporate Payments in Edinburgh.

But he noted that the jobs report was far from perfect, citing December's downward revision and the weak wage growth for such a tight U.S. labor market.

"All this means is that inflationary pressure is modest, and the Federal Reserve will feel in no hurry to push through its next interest rate hikes," Lamb said.

Beyond the headline jobs gains, the dollar has become more sensitive to wage inflation over the last year.

The report showed the U.S. economy created 304,000 jobs, the highest in 11 months, easily superseding forecasts for 165,000 jobs. The unemployment rate, however, rose to a seven-month peak of 4 percent, while average hourly earnings rose just 0.1 percent in January, after rising 0.4 percent in December.

Contracts tied to the Fed's policy rate had priced out any chance of a 2019 Fed rate hike after Fed Chairman Jerome Powell on Wednesday said the case for rate increases had weakened, and were pricing in about a one-in-three chance of a rate cut by the end of the year.

But after the jobs data, traders reduced rate-cut bets, though they continue to bet against a rate hike.

In afternoon trading, dollar gained 0.6 percent against the yen to 109.52, as the dollar index trading little changed on the day at 95.579.

The dollar overall also benefited from a rise in the U.S. manufacturing index to 56.6 in January, from 54.3 the month before.

"The rebound in the ISM manufacturing index ... provides further reassurance that economic growth has remained solid at the beginning of 2019," said Michael Pearce, senior U.S. economist at Capital Economics.

"We still expect a combination of weaker global demand and the strong dollar to weigh on the manufacturing sector this year, but it is clear that activity is not falling off a cliff," he added.

The euro, meanwhile, rose 0.1 percent versus the dollar to $1.1458.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Frances Kerry and James Dalgleish)

By Gertrude Chavez-Dreyfuss