* U.S. jobs report disappoints, dollar weakens
* Euro hit from German objections to ECB bond-buying short-lived
* German Constitutional Court also leaves door open to acceptance of program
* Canadian jobs data better-than-expected, pushes loonie higher
By Daniel Bases
NEW YORK, Feb 7 (Reuters) - The dollar drifted lower after a weaker-than-expected U.S. jobs report on Friday that muddies the waters but is seen as unlikely to dissuade the Federal Reserve from diverting from its path of steadily removing monetary stimulus from the U.S. economy.
U.S. nonfarm payrolls growth in January came in at a disappointing 113,000 against a consensus of 185,000, initially sending the greenback sharply lower. However, a bright spot in the report showed the proportion of working age Americans who have a job or are looking for one increased.
After a knee-jerk sell-off of the dollar and an equally quick rebound, much of the greenback's strength was slowly bled away like a leaky balloon as the trading day wore on.
One strategist thinks the fact the dollar fell at all was based on the idea that next week's Congressional testimony by newly installed Federal Reserve Chair Janet Yellen will be more dovish when it comes to keeping monetary policy loose because of extreme weather impacting the data.
David Woo, head of global rates and currency research at Bank of America Merrill Lynch in New York, thinks this is a misreading of the data and Yellen and the cause of the dollar's weakness.
"I think the market reaction to today's number is based upon a more pessimistic reading of the economy than I think is justified and therefore the market expectations that the Fed may not now taper in March may be less justified than the market thinks it is," Woo said, leading to the dollar's decline
The euro finished near the top of its range for the day, up 0.331 percent to $1.36350, after having dropped back from its session high $1.36490 on the EBS trading platform.
Nick Bennenbroek, head of currency strategy at Wells Fargo Securities in New York, said that as the market digested the data and looked to the next Fed meeting in mid-March, "the bar is pretty high for them to deviate from the path."
The jobs report was the second month of weak hiring, although the jobless rate did decline to 6.6 percent from 6.7 percent.
An earlier factor holding back the euro's advance, and eventually overshadowed by the U.S. data, was news that Germany's constitutional Court's decision to refer a complaint against the European Central Bank's bond-buying program to the European Court of Justice.
The complaint says the ECB's plan, which pumps money into the financial system much the same way as the U.S. quantitative easing program, oversteps its mandate and violates a ban on it funding governments.
The ECB's Outright Monetary Transactions (OMT) program, announced by President Mario Draghi in September 2012 at the height of the sovereign debt crisis and as yet unused, is widely credited with pulling the euro zone back from the brink.
"The ECB has to quickly assess what repercussions the ruling will have for the range of tools available to calm markets," said Christian Schulz, senior economist at Berenberg. "Ironically, depending on the exact decision, the court may have made a much more wide-ranging quantitative easing program at the ECB more likely."
The euro traded up 0.50 percent to 139.45 yen. The dollar also advanced against the yen, after regaining ground from the initial sell-off after the jobs data. The greenback rose 0.19 percent to 102.28 yen.
In contrast to the weak U.S. jobs data was an upbeat report from Canada which showed a bigger-than-expected increase in its January payrolls.
"I think this increase in employment in January dampens expectations of the possibility of the Bank of Canada having to cut rates. But certainly with inflation remaining low, there's no pressure to start moving rates higher," said Paul Ferley, assistant chief economist at Royal Bank of Canada.
The U.S. dollar fell 0.27 percent to C$1.1038. It had been as low as C$1.0964, its weakest point in 2-1/2 weeks.
Sterling extended its gains against the greenback as the trading session wore on, climbing 0.56 percent to $1.6412 , its best level of the week.