The dollar extended its gains yesterday following a sharp rally on Friday after US employment data came in far stronger than expected.

A much smaller-than-forecast drop in US non-farm payrolls in November, combined with substantial downward revisions to job losses in previous months, pushed investors to reassess the view that US interest rates would remain at ultra-low levels for the foreseeable future.

This prompted a rally in US bond yields, which supported the dollar across the board. Analysts said the figures caused investors to rethink their positions, given that data from the Chicago Mercantile Exchange released over the weekend revealed short positions in the dollar ahead of the data were at their highest levels since March 2008.

Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ said the employment data highlighted the fact that too much bad news had been priced into the dollar regarding the health of the US labour market.

He said while there was little chance that the Federal Reserve would change its policy stance at its December meeting, more positive news from the labour market might force the central bank to abandon its commitment to keep US interest rates at low levels for “an extended period” at its January meeting. “The scale of recovery in the employment report suggests that the recovery under way in the labour market is real and that even the Federal Reserve itself has been too gloomy,” said Mr Halpenny.

The dollar index, which tracks its progress against a basket of six leading currencies, rose to a high of 76.183, its strongest level in a month.