FOREX-Dollar falls as U.S. economy posts job decline

(Recasts, updates prices, adds comment, adds byline)

By Steven C. Johnson

NEW YORK, April 4 (Reuters) - The dollar fell on Friday after a report showed the U.S. economy shed jobs for a third straight month, confirming fears that the country may already be in a recession.

Both the euro and yen posted gains on the greenback after the government said U.S. employers cut 80,000 jobs in March, more than expected and the biggest monthly fall in five years.

The dollar had recovered most of its earlier losses by late afternoon, however, as traders said the data did not come as a big surprise to a market that has long expected the Federal Reserve to cut interest rates again late this month.

"The jobs data was pretty horrible, but I think yesterday's jump in weekly jobless claims gave people a good inkling that today's report was not going to be good," said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington.

"Most of the negatives for the dollar and the U.S. economy are already priced in, and there's a feeling that we may be reaching a bottom in the dollar," he added.

In late trade, the euro was up 0.3 percent at $1.5728 EUR=. It had climbed as high as $1.5774 after the jobs data but ran into aggressive selling at that level.

The dollar was at 101.58 yen JPY=, 0.7 percent below late Thursday, and fell 0.4 percent to 1.0060 Swiss francs CHF=.

But it was up 3 percent against the Japanese currency on the week, on track for its biggest weekly gain since 2004. The dollar index .DXY, which measures the greenback against a basket of major currencies, ended the week 0.5 percent higher.

Shaun Osborne, chief currency strategist at TD Securities in Toronto, said some traders were looking to trim bets in favor of the euro ahead of a European Central Bank meeting on Thursday.

The ECB is expected to hold interest rates at 4 percent, but a string of recent weak euro zone data has traders waiting to see if President Jean-Claude Trichet softens his stance on inflation, which could signal a rate cut later this year.

Steady euro zone rates at a time when the Fed has slashed U.S. benchmark rates from 5.25 percent to 2.25 percent in recent months have boosted the euro's appeal over the dollar.

U.S. ECONOMY NOT OUT OF THE WOODS

Osborne said the euro will probably settle into a $1.55-$1.58 range next week, though he said the dollar remained at risk should U.S. economic data worsen or another Wall Street bank fall prey to massive mortgage-related losses.

"I still find it hard to believe we are done and dusted with the move up (in the euro)," he said. "We've had many false dawns before, and I think we need a more important catalyst than just saying that the U.S. bad news is priced in before the dollar recovers."

The deteriorating employment situation in the United States also remains a concern, particularly a jobless rate that the government's data on Friday showed jumped to 5.1 percent from 4.8 percent.

"Today's jump in unemployment to 5.1 percent may well be a harbinger of things to come," said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon.

Elsewhere, the Australian dollar AUD= managed a 0.6 percent gain against its U.S. counterpart despite an unexpected dip in Australian February retail sales data.

The U.S. dollar was up 0.4 percent against the Canadian dollar CAD= after an early Canadian government report showed that Canada's unemployment rate rose more than expected, fueling expectations for rate cuts from the Bank of Canada. (Additional reporting by Nick Olivari; Editing by James Dalgleish)