A widely expected rate increase by the European Central Bank on Thursday could also add pressure on the Federal Reserve to begin reversing its super-loose monetary policy.
Such an increase would be the ECB's first rate hike since October 2008 and widen interest rate differentials further between the U.S and Europe.
A surge in eurodollar futures in early March fuelled by expectations that the earthquake in Japan would stay the Fed's hand in tightening policy has taken a sharp U-turn in the past two weeks due to hawkish comments from some Fed officials.
While the disaster could push the Japanese economy back into recession for a few quarters, analysts now do not expect it to have a major impact on global economic growth.
Barclays strategists said the March employment report, which showed the U.S. jobless rate slipping to 8.8 percent, signaled a continuation of the trend towards solid business expansion, notwithstanding risks such as the Middle East unrest and rising commodity prices.
Even though the shift in rate expectations has led to some heavy profit-taking in the eurodollar and fed fund futures markets, a majority of analysts in a Reuters poll do not expect a rate hike in 2011.
"The message here is that we do not believe the softness in the first quarter data should be interpreted as the start of a significant slowdown," they said.
Underlining that optimistic view, hawkish comments from some Fed officials hurt the market last week with two-year Treasuries , seen as among the most vulnerable to interest rate risk, underperforming longer-dated debt including 10-year notes.
Two-year notes briefly tested support at yields of around 0.89 percent on Friday, their highest levels since last May before subsiding to around 0.80 percent on Monday.
The gap between two-year and 10-year note yields has narrrowed to around 266 basis points from 283 bps on March 8.
Players in the fed fund futures markets are expecting about 40 bps of increase in U.S rates by March 2012.
Rate markets are also eyeing a speech by Fed chief Ben Bernanke later in the day where he might temper some of the recent hawkish comments by other Fed officials. (Editing by Kim Coghill)
