Dollar falls on soft payrolls report

NEW YORK (Reuters) - The dollar fell on Friday after a report showed U.S. payrolls in April grew at their slowest pace in more than two years, suggesting an economic slowdown has finally caught up with the labor market.

The data cast a cloud over near-term U.S. growth and bolstered the case for an interest rate cut by the Federal Reserve later this year, pushing the euro to a session peak at $1.3610 EUR=, near a record high above $1.3680.

Earlier this week, the dollar enjoyed its biggest rally in two months against the most liquid currencies as reports showing strength in the U.S. manufacturing and services sectors in April snapped a string of weak economic data.

"The dollar's recovery has been cut short by the weaker-than-expected employment data," said Marc Chandler, senior strategist at Brown Brothers Harriman in New York.

According to the Labor Department release, U.S. employers added 88,000 new positions in April, fewer than forecast and less than half of March's total gains.

The report also revised down the number of jobs created in March and February, suggesting the labor market was not as resistant to the slowing economy as previously thought, while the jobless rate edged up to 4.5 percent from 4.4 percent.

Scotia Capital strategist Camilla Sutton said the data, taken together, suggests the U.S. labor market has peaked and points to "an environment where the likelihood of Fed cuts has increased."

Late afternoon, the euro was up 0.3 percent at $1.3594, while the dollar was down 0.2 percent to 120.10 yen, just above an intraday low of 119.92 yen JPY=.

Against the Swiss franc, the dollar fell 0.4 percent to 1.2109 francs CHF=.

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Strategists said signs of slower U.S. growth at a time when other major economies, including the euro zone and Britain, continue to show signs of expansion should keep the dollar under pressure.

Both the Bank of England and European Central Bank have policy meetings next week, with the former expected to raise interest rates to 5.5 percent -- above 5.25 percent in the United States -- and the latter seen preparing markets for a hike in June.

Currencies with higher interest rates offer a higher yield and are thus more attractive to investors.

"Until next week, when we have central bank meetings, we are likely to keep seeing the buck sliding," said Mark Meadows, currency analyst at Tempus Consulting in Washington.

The Fed also holds a one-day policy meeting next week but is widely expected to keep interest rates on hold.

The dollar has weakened considerably in the past year, falling to 26-year lows against sterling and all-time lows against the euro.

The dollar index .DXY slipped 0.3 percent to 81.720 after having traded earlier at its highest since April 17.

"I still think there has been a material loss of the dollar's upside momentum," said Alan Ruskin, chief global strategist at RBS Greenwich in Greenwich, Connecticut.

The Australian dollar AUD= fell to US$0.8210, near a four-week low after the Australian central bank lowered its forecast for underlying inflation, suggesting rates were on hold for the rest of the year.

(Additional reporting by Vivianne Rodrigues and Gertrude Chavez-Dreyfuss)