* ADP shows more jobs created than expected in U.S. private sector
* U.S. jobless claims fall for 2nd straight week
* Euro hits five-week low versus dollar on Portugal woes
* Focus shifts to ECB meeting and U.S. payrolls data
By Julie Haviv
NEW YORK, July 3 (Reuters) - The safe-haven yen rose against a swath of currencies on Wednesday as investors sought its refuge due to political instability in Egypt and Portugal, although encouraging signs in the U.S. labor market had it curbing gains against the dollar.
Japan's currency as well as the Swiss franc, also favored during times of turmoil, were supported by worries about unrest in Egypt. Fears it could destabilize the Middle East and lead to supply disruption pushed oil to a 14-month peak.
In Europe, Portugal's president summoned main political parties for crisis talks over the government's future with markets reeling on fears that a snap election could interfere with Lisbon's exit from an international bailout.
Portugal's 10-year bond yield shot above 8 percent and its stock market slumped 5 percent. Portugal's teetering government underlined the threat that the euro zone crisis, in hibernation for almost a year, may be awakened.
"International developments are having an effect in the currency market and that's why the yen is higher," said Nick Bennenbroek, head of currency strategy at Wells Fargo Securities in New York.
"Obviously, the unresolved situation in Egypt and the government resignations in Portugal are an issue. We're not only seeing some of the G10 currencies weaken, but also emerging market currencies."
The dollar however did get a modest reprieve against the yen following data showing the U.S. private sector created more jobs than expected in June, while U.S. initial weekly jobless claims fell for a second straight week.
The reports boded well for Friday's U.S. nonfarm payrolls data and more importantly affirmed a growing conviction the Federal Reserve will scale back its quantitative easing economic stimulus program sooner than expected.
"The payrolls data has always been important but this Friday's report is going to be crucial as it should confirm when the Fed may taper its bond-buying program," said Ben Emons, senior vice president/global portfolio manager at Newport Beach, California-based PIMCO, which had $2.1 trillion in assets under management as of March 31.
"The Fed has communicated that it is data-dependent and this report could change expectations," said Emons, who co-oversees $75 billion in global assets and is part of the team that oversees PIMCO's Foreign Currency Strategy ETF.
Nevertheless, while Wednesday's labor market data was positive, a U.S. service sector report for June was far from stellar, showing growth at the slowest pace in more than three years. Investors, however, took comfort from the survey's employment gauge, which rose.
Friday's U.S. nonfarm payrolls report is expected to show job gains of 165,000 last month and an unemployment rate edging down to 7.5 percent.
In late afternoon New York trading, the dollar was down 0.8 percent to 99.84 yen, off the day's low of 99.24.
The euro pared losses, however, as Portuguese bond yields came off their highs, trading down 0.5 percent at 129.94 yen, but far above the day's trough of 128.60 yen.
Against the dollar, the euro had fallen to $1.2921, its lowest since late May, but last traded up 0.3 percent at $1.3008.
Meanwhile, the dollar index, which measures the currency's value against a basket of currencies, fell 0.4 percent at 83.194 , off a five-week peak of 83.717.
The U.S. stock market closed at 1 p.m. (1700 GMT) and the Treasury market at 2 p.m. (1800 GMT), with both closed on Thursday in observance of the U.S. Independence Day holiday.
Thin trading could make for volatile trading in the coming days, with European Central Bank and Bank of England meetings on Thursday on top of Friday's U.S. jobs report.
The dollar is seen rallying on a strong U.S. jobs report as it will cement expectations that the Fed will scale back stimulus at a time when other central banks are more likely to ease policy. The dollar should sell off, however, should the data show tepid jobs growth.
In other currencies, the higher-yielding Australian dollar slid to a near three-year low of US$0.9049 after Reserve Bank of Australia Governor Glenn Stevens said he was surprised by the resilience of the currency.
The Aussie dollar last traded at US$0.9064, down 0.9 percent on the day.
Against the Swiss franc, the dollar fell 0.4 percent to 0.9468 franc and the euro fell 0.1 percent to 1.2318 francs, according to Reuters data.