FOREX-Dollar falls as traders pull back on early gains

LONDON Reuters -- The dollar fell on Monday after it lost some of the gains it had made from Friday's U.S. jobs data, as currency markets pulled back on their initial reaction.

The dollar was stronger against major peers, higher than expected U.S. employment figures last week. The data was seen by traders as an indication that the U.S. Federal Reserve could raise interest rates more aggressively to combat inflation.

The dollar index fell to 106.25 by 0750 GMT, down 0.4% on the day, compared to Friday's 10 day high of 106.930, as the dollar index fell to 106.25 in early European trade on Monday.

According to Refinitiv data, Traders were pricing in a 69% chance that the Fed will raise rates by 75 basis points at its September meeting.

Fed Governor Michelle Bowman said on Saturday that the Fed should consider more 75 bps hikes at coming meetings to bring inflation back down.

In a note to clients, MUFG currency analysts Derek Halpenny and Lee Hardman wrote that the U.S. dollar has been supported by stronger U.S. economic data releases and hawkish comments from regional Fed presidents that have encouraged market participants to push back expectations for a dovish policy pivot from the Fed.

We believe there is room for the U.S. dollar to rebound further in the near-term, and we recommend a new long USD CAD trade idea to reflect our bullish outlook for the U.S. dollar. Markets are waiting for U.S. inflation data on Wednesday to give more clues about the health of the world's largest economy. Analysts said that annual inflation fell to 8.7% in July from 9.1% previously.

RBC analysts said that the market had reached an equilibrium between inflation and growth, and that they would wait for more data releases before they can take a view on the market's next direction.

The Australian dollar recovered after Friday's losses. It was up 0.9% on the day to $0.697 at 0751 GMT.

The New Zealand dollar was up 0.4% at $0.627.

The dollar fell against the yen, with the pair changing hands at 134.945.

The euro zone bond yields fell back down after the jobs data showed that they had gained on Friday. Italian bonds appeared to be brushing off a decision by Moody's to lower Italy's ratings outlook.

The euro was up 0.2% at $1.02095.

If quiet summer markets cause renewed interest in carry trade, the euro will probably be one of the preferred funding currencies, said Chris Turner, ING FX analyst.

The British pound was up 0.4% at $1.2118, up 0.4%.

Foreign Secretary Liz Truss - who is expected to replace Boris Johnson as prime minister next month - has said she plans to hold a review of the Bank of England's mandate.