By Herbert Lash
NEW YORK (Reuters) - The U.S. dollar and government debt yields jumped on Friday after strong gains in hourly wages unveiled in the U.S. government's jobs report for September boosted the likelihood the Federal Reserve will raise interest rates by year's end.
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, in September after rising 0.2 percent a month earlier. The gains came as nonfarm payrolls fell by 33,000 jobs last month against expectations of a jobs gain of 90,0000.
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."
The dollar index, tracking the greenback against a basket of key currencies, fell 0.11 percent, with the euro up 0.18 percent to $1.1731. The Japanese yen weakened 0.07 percent versus the greenback at 112.90 per dollar.
Benchmark 10-year notes fell 7/32 in price to yield 2.3733 percent, paring losses that earlier had sent yields above 2.4 percent.
The jobs report tempered equity markets that had rallied all week with MSCI's world stock index and the three major U.S. gauges on Wall Street setting four successive record closing highs.
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.
"If wages are starting to increase more prominently, that will give the FOMC the justification that they'll need to hike rates in December," Price acknowledged, referring to the Fed's policy-setting Federal Open Market Committee.
Still, Price urged caution against over-interpreting these numbers.
The gain in average hourly earnings is not surprising as there was a drop of 105,000 jobs in the restaurant and food service category, said Heidi Learner, chief economist In New York for Savills Studley, a unit of Savills Plc.
The sector has registered an average monthly employment gain of 24,000 over the past year, Learner said. The drop in low-paying jobs skewered hourly earnings.
The Dow Jones Industrial Average fell 27.57 points, or 0.12 percent, to 22,747.82. The S&P 500 lost 6.85 points, or 0.27 percent, to 2,545.22 and the Nasdaq Composite dropped 9.68 points, or 0.15 percent, to 6,575.67.
The pan-European FTSEurofirst 300 index lost 0.43 percent and MSCI's gauge of stocks across the globe shed 0.24 percent.
Spot gold added 0.3 percent to $1,271.60 an ounce.
Oil prices fell around 2 percent and were set to end Brent's longest multi-week rally in 16 months following profit taking and the return of oversupply concerns.
Brent was last at $55.21 per barrel, down 3.14 percent on the day, while U.S. crude fell 3.27 percent to $49.13.
(Reporting by Herbert Lash; Editing by Bernadette Baum)
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