FOREX-Dollar rally falters; cloud still hanging over U.S.

ADVISORY: Please note that there is reduced FX coverage in Europe on Monday owing to a public holiday in the UK. Full European coverage will resume on Tuesday.

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By Veronica Brown

LONDON, May 5 (Reuters) - The dollar fell broadly on Monday in Europe after failing to build on gains made after slightly more robust than expected U.S. jobs data last week, as investors concluded that more pain was likely for the U.S. economy.

The euro shrugged off data showing euro zone investor morale had unexpectedly weakened in May, drawing support from the inflationary impact of higher oil prices as crude CLc1 rose above $117 a barrel toward recent record highs.

Activity was thin due to public holidays in Britain and Tokyo, which also helped sharpen sterling's fall versus the euro with dealers reporting good buying of euro/sterling as the market approached key technical levels.

The dollar had firmed on Friday after U.S. payrolls fell in April by a smaller-than-expected 20,000, while the jobless rate dipped to 5.0 percent. [ID:nN02551119]

But further assessment of the data left investors wary of calling a sustained dollar recovery, with more economic and corporate fallout expected from the ongoing credit crunch that started in August last year.

"The jobs data was still a negative number so people have tried to reassess the data they saw last week. They realise that the worst is not over and we will still have to expect weak U.S. data so it's not the time to buy the dollar strongly," said Antje Praefcke, currency strategist at Commerzbank.

With U.S. service sector data due at 1400 GMT also expected to post a decline, some analysts said expectations for the U.S. Federal Reserve to pause in its aggressive rate cutting cycle after last week's rate 25 basis point easing to 2 percent might prove premature.

The dollar was down a third of a percent on the day against a basket of six major currencies .DXY at 73.263, while the euro was up 0.4 percent at $1.5490, with traders citing a technical target of $1.5500 EUR=.

But the single currency was still some 3.3 percent below record highs seen last month at $1.6018.

The yen stayed weak against the euro EURJPY= as tentative risk appetite encouraged traders to borrow the low-yielding Japanese currency to buy high yielders, such as the Australian AUD= and New Zealand NZD= dollars.

Trade in sterling was choppy due to thin conditions, with the euro last up 0.3 percent at 78.48 pence, but still some way off record high of 80.98 pence EURGBP=.

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