By Herbert Lash
NEW YORK (Reuters) - The U.S. dollar tumbled and debt yields pared sharp gains on Friday on a report that North Korea is preparing to test a long-range missile, reversing earlier jumps after U.S. jobs data for September raised the likelihood of an interest rate hike in December.
A Russian lawmaker just returned from a visit to Pyongyang was quoted by Russia's RIA news agency as saying that North Korea believes the missile can reach the U.S. West Coast.
"The market is getting more nervous about the prospect of some kind of a conflict," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
"If they do something over the weekend, even if it's a mild test, I'm sure we're going to open up a with little bit of risk aversion on Monday."
The jobs data and North Korea report tempered equity markets that had rallied all week and sent MSCI's world stock index, along with the three major U.S. gauges on Wall Street, to four successive record-closing highs.
The Nasdaq edged up at the close, its ninth straight higher close, while the S&P 500 and Dow ended the session slightly lower.
The dollar index <.DXY> fell 0.17 percent.
The euro rebounded 0.2 percent to $1.1733, while the Japanese yen reversed course to strengthen 0.16 percent at 112.63 per dollar.
The dollar and government debt yields had jumped earlier on strong gains in average hourly wages, which suggested the pace of inflation could quicken closer to the Federal Reserve's target of 2 percent.
U.S. employment fell in September for the first time in seven years as Hurricanes Harvey and Irma temporarily displaced workers and delayed hiring, the latest sign the storms undercut economic activity in the third quarter.
Average hourly earnings increased 12 cents, or 0.5 percent, after rising 0.2 percent in August. The gains came as nonfarm payrolls fell by 33,000 jobs last month against expectations of a 90,0000 gain.
The yield on two-year U.S. Treasury notes soared to their highest in nine years, while the dollar hit an almost three-month high against the Japanese yen and almost a two-month high against the euro.
The jump in average hourly earnings surprised investors who were aware the headline employment number would be distorted by the hurricanes, said Win Thin, head of emerging markets currency strategy at Brown Brothers Harriman in New York.
"This is the missing piece in the Fed's puzzle," he said. "The dollar rally is back on track and should continue next week."
Benchmark 10-year notes fell 5/32 in price to yield 2.3697 percent, paring gains that earlier had sent yields above 2.4 percent.
However, the report should be taken with a large grain of salt as the jump in wages is likely to show near equal weakness in October, said Russell Price, senior economist at Ameriprise Financial Services Inc in Troy, Michigan.
The Dow Jones Industrial Average <.DJI> fell 1.72 points, or 0.01 percent, to 22,773.67. The S&P 500 <.SPX> lost 2.74 points, or 0.11 percent, to 2,549.33 and the Nasdaq Composite <.IXIC> added 4.82 points, or 0.07 percent, to 6,590.18.
The pan-European FTSEurofirst 300 index <.FTEU3> lost 0.37 percent to close at 1,530.83, while MSCI's gauge of stocks across the globe <.MIWD00000PUS> shed 0.07 percent.
U.S. December gold futures settled up 0.1 percent at $1,274.90.
Oil prices fell more than 2 percent, ending Brent's longest multi-week rally in 16 months, after profit-taking and the return of oversupply concerns.
Brent settled at $55.62 per barrel, down $1.38 on the day, while U.S. crude fell $1.50 to settle at $49.29.
For a graphic on U.S. jobs report click http://reut.rs/2ysC81N
For a graphic on world FX rates in 2017 click http://tmsnrt.rs/2egbfVh
(Additional reporting by Karen Brettell and Dion Rabouin in New York; Editing by Bernadette Baum and Nick Zieminski)