* Dollar drops broadly on weak U.S. jobs data
* Demand for euro zone strugglers’ bonds supports euro
* Portuguese bond yields slip further
* Focus expected to remain on upcoming economic data
By Julie Haviv
NEW YORK, Jan 10 (Reuters) - The dollar fell broadly after weaker-than-expected U.S. jobs data on Friday affirmed expectations that the Federal Reserve will take a gradual approach to tapering its bond buying program this year.
U.S. employers hired the fewest workers in almost three years in December, but the setback was likely to be temporary amid signs that cold weather conditions might have had an impact.
Nonfarm payrolls rose only 74,000 last month, the smallest increase since January 2011, and the unemployment rate fell 0.3 percentage point to 6.7 percent, the Labor Department said on Friday. The unemployment rate was the lowest since October 2008 and in part reflected people leaving the labor force.
“It was clearly a disappointing number, and the markets are reflecting that disappointment by selling the dollar across the board,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington D.C..
“But, I do not think it alters the outlook for steady reductions in Fed stimulus. Certainly it will temper any talk of more accelerated pace of Fed policy reduction,” he said.
The U.S. central bank announced in December that it would trim its monthly purchases of bonds to $75 billion from $85 billion, and many economists expect it to decide on a similar-sized cut at its next meeting on Jan. 28-29.
Against the yen, the dollar last traded at 104.44 yen, down 0.7 percent and below the session’s high of 105.12 yen.
U.S. Treasury yields, which move inversely to price, fell while stocks traded slightly lower.
Meanwhile, demand for euro zone peripheral government bonds kept the euro away from a one-month low against the dollar.
A key theme at the start of 2014 is the divergence of outlooks on monetary policy, from which the pound and dollar have both, on balance, benefited at the expense of the euro.
European Central Bank President Mario Draghi added to pressure on the euro on Thursday by firming up the bank’s promise to take more action to lower market borrowing costs if need be.
But while the euro zone economy still looks fragile, government finances and banking in the bloc broadly look far healthier than six months ago, and players are starting to trade heavily on improvement in its debt-laden southern half.
“There’s definitely a strong repricing of the euro going on,” said Arne Lohmann Rasmussen, head of FX research at Danske Bank in Copenhagen.
“People want to take part in the very strong performance and carry being provided by southern Europe,” he said.
Portuguese bond yields slipped further to near seven-month lows on Friday after Lisbon’s first 2014 debt sale drew solid demand on Thursday and before a review of the country’s credit ratings outlook later in the day.
Data also showed the French economy - seen by many as a weak link in the currency bloc - grew 0.5 percent in the fourth quarter, while Spanish and French industrial output figures were robust.
The euro last traded down 0.3 percent against the yen at 142.24 yen.
The dollar had been trading higher versus the euro prior to the jobs data, but the single currency last traded up 0.4 percent at $1.3664, according to Reuters data.