* U.S. labor costs rise in second quarter
* U.S. weekly jobless claims just above expectations
* Traders eye nonfarm payrolls growth (Updates prices, adds comments; changes dateline; previous LONDON)
By Sam Forgione
NEW YORK, July 31 (Reuters) - The U.S. dollar edged higher against a basket of major currencies on Thursday after U.S. labor market data bolstered expectations for a more hawkish Federal Reserve and reinforced optimism for a strong U.S. nonfarm payrolls report Friday.
The Labor Department said the Employment Cost Index, the broadest measure of labor costs and one of Fed Chair Janet Yellen’s favorite labor market gauges, rose 0.7 percent in the second quarter, marking the biggest increase in over 5-1/2 years.
U.S. weekly jobless claims, meanwhile, rose to 302,000 in the latest week. While that was slightly above expectations, the four-week average of claims fell 3,500 to 297,250, the lowest since April 2006.
Higher wages “give the Fed increasingly less justification to maintain its ultra-easy monetary policy,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
While the dollar was on track for its best monthly gain in roughly a year and a half, Thursday’s rise was mild as traders awaited Friday’s nonfarm payrolls data, which economists expect will show U.S. employers added 233,000 jobs in July.
“Investors are trimming some exposure to the dollar after its gains overnight ahead of the nonfarm payrolls,” said Esiner.
Analysts have said the Fed may take a more hawkish stance on raising interest rates at its next policy meeting in September in light of the recovering U.S. economy. Higher rates are expected to boost the dollar by driving flows into the United States.
While upgrading its assessment of the economy, the Fed reiterated in a policy statement on Wednesday its concerns about slack in the labor market and reaffirmed that it is in no rush to raise interest rates.
The dollar briefly turned negative against major currencies after data showed the Institute for Supply Management-Chicago business barometer fell to 52.6, below economists’ expectations for a rise to 63. But it quickly rebounded as traders remained optimistic on U.S. economic growth.
The data is “amongst a larger set of data releases that certainly indicate better growth in the U.S.,” said Sebastien Galy, currency strategist at Societe Generale in New York.
The U.S. dollar index, which measures the dollar against a basket of six major currencies, was last up 0.01 percent at 81.441, down from a 10-1/2 month high of 81.573 touched earlier in the session.
The euro was last down 0.07 percent against the dollar at $1.3387, just above an eight-month trough. The dollar was last up 0.07 percent against the Japanese yen at 102.85 yen, but was down 0.02 percent against the Swiss franc at 0.9085 franc.
The Benchmark 10-year U.S. Treasury note yield rose to 2.58 percent, from 2.55 percent late Wednesday.
Reporting by Sam Forgione; Editing by Dan Grebler