The Dollar's Rally Is Just Getting Underway. By Nicholas Hastings

The list of reasons for buying the dollar is growing longer.

It is not just that data later Friday are likely to show a sharp recovery in the U.S. jobs market, but that interest rate differentials with the dollar's main rivals--the euro and the yen--continue to move in its favor.

This week has already brought a fall in the euro to a new four-year low against the dollar as the market digested the economic and political risks associated with the bailout of euro-zone sovereign debtors.

The conclusions were far from positive, with chances of default remaining high and the future of the single currency still very much in doubt.

If that isn't enough reason to sell the euro, there is always the disappointing economics of the region.

See how far the euro has already fallen against the dollar this year:



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As Thursday's figures showing a 1.2% fall in euro-zone retail sales last month indicated, the region's recovery remains dependent on exports and the consumer sector is still flat on its back. And this is even before the austerity packages that most member states will have to introduce this year kick in.

So even the optimists, who have been talking of euro-zone resilience, trying to exude confidence that the region will muddle through, will soon start to lose their nerve.

The European Central Bank, meanwhile, which has been forced to reintroduce some sort of quantitative easing to ensure liquidity in the financial sector, is hardly likely to start talking about higher interest rates at this stage.

In contrast, U.S. economic data continue to prove stronger than anticipated and the non-farm payrolls later in the day should confirm that the recovery is now gaining serious traction.

After rising by 290,000 in April, payrolls are forecast to show an even greater 515,000 increase in May.

With consumer prices remaining subdued, there is still little pressure on the U.S. Federal Reserve to start hiking interest rates just yet. But, as the rate rise by the Bank of Canada earlier this week illustrated, pressures for higher rates are starting to grow.

This can hardly be said about Japan, where the resignation of Yukio Hatoyama this week has ushered in a new prime minister who will pursue an even more accommodative monetary policy.

Former Finance Minister Naoto Kan, who won the election earlier Friday, has long made it clear that he prefers a weaker yen to ensure that Japan's export-led recovery is sustained.

Add this to the political uncertainty that will prevail before next month's Upper House elections, as well as the risk of a credit downgrade by ratings agencies if the country doesn't address its fiscal deficit soon, and the reasons for selling the yen mount even further.

So even the possibility of greater bank regulation in the U.S., which would make credit less readily available, and the removal of fiscal priming in the U.S. housing market, which will reduce buoyancy in the housing market, still leave the U.S. economy as the bright spot in the global recovery and the dollar the major currency to buy.

Nervousness ahead of the payrolls data later Friday left currency markets fairly subdued at the start of business in Europe, with the dollar trading nearly flat at Y92.68 at 0645 GMT, compared with Y92.64 late Thursday in New York, according to EBS.

But rising yield spreads for Spanish and Italian bonds and fears that Hungary's poor fiscal position could now put that country at risk of a sovereign default are likely to keep the euro from making too much headway.

The euro is up at $1.2184 from $1.2156, as well as up at Y112.95 from Y112.63 as investors straighten positions ahead of the U.S. data.