TOKYO, Aug 4 - The dollar fell against the yen on Monday, retreating further from three-month highs hit last week after an employment report dulled expectations for a strong recovery in the U.S. economy. But trading was confined to narrow ranges as traders avoided taking large positions ahead of Japanese summer holidays next week and as many Japanese exporters have completed shedding dollar holdings for now. "All eyes are on the U.S. side now so it's hard to move in Tokyo. Dealers will start taking holidays and companies will be on holiday, too," said a dealer at a major Japanese bank. "On the (dollar's) downside there are fears of intervention and on the upside dealers have confirmed that there's a strong barrier, so dollar/yen will be sandwiched and stay rangebound." The U.S. Labor Department surprised markets on Friday with news that nonfarm payrolls shed 44,000 jobs in July. A gain of 18,000 jobs had been expected. The department also revised down overall payrolls for June to a drop of 72,000 from an initially reported 30,000 decrease, highlighting barren conditions in the job market. The jobless rate slipped to 6.2 percent in July from 6.4 percent a month earlier, but that was seen due in part to job seekers becoming discouraged and abandoning their search. "The job figures were pretty weak. They were in sharp contrast with recent signs of a strong performance in production and consumption," said Hiroshi Yokotani, economist at Tokio Marine Asset Management. As of 0541 GMT, the dollar was trading at 119.95/98 yen compared with 120.10 yen in late U.S. trade last week. On Friday, the greenback slipped from a three-month high of 120.69 yen, as traders who had bought dollars on expectations the jobs data would handily exceed forecasts rushed to sell. The euro was slightly weaker at $1.1272/77 compared with around $1.1280. But the single currency kept a comfortable distance from a two-week low of $1.1135 hit on Friday before the U.S. jobs report. It dropped to 135.20/31 yen from around 135.40 yen.
EYES ON U.S. ECONOMY
The dollar got little help from Friday's U.S. manufacturing report, which matched market expectations. The Institute for Supply Management said its manufacturing index rose in July, matching forecasts for a 51.8 reading. An index higher than 50 suggests expansion in the manufacturing sector. "The worst for the U.S. economy is clearly over. But market players don't know if recovery is sustainable," said Kota Kimura, assistant forex manager at Shinkin Central Bank. Still, hopes for a U.S. recovery remained solid and are likely to help the dollar in the near term. "I think the jobs market will improve and catch up with production," said Yokotani of Tokio Marine Asset, pointing to the fact that weekly jobless claims were below the key 400,000 mark for the last two weeks. "Auto sales data (released on Friday) was pretty strong in July at an annual rate of 17.3 million. This mean that retail sales in July also should be pretty strong" he added. With no major economic indicators due for release this week, the market is expected to keep a close eye on the stock markets in New York and Tokyo.