FOREX-Yen firms as U.S. unemployment rises above 10 pct

* Risk aversion rises after weak U.S. jobs data

* U.S. Oct payrolls fall 190,000, jobless rate at 10.2 pct

* Traders reduce bets of Fed raising interest rates

* Investors also keep an eye on G20 meeting (Adds details, updates prices)

By Wanfeng Zhou

NEW YORK, Nov 6 (Reuters) - The yen rose on Friday after a report showed the U.S. unemployment rate spiked to 10.2 percent, fueling worries about the health of the economy and boosting safe-haven demand for the Japanese currency.

The government reported U.S. employers cut a deeper-than-expected 190,000 jobs in October, driving the unemployment rate to a 26-1/2-year high. For details, see [ID:nN04495174].

The news dashed hopes the recession was ending after recent gross domestic product and jobless claims readings had seemed to point to a recovery. With the labor market still weak, U.S. consumer sentiment and spending will likely remain under pressure, analysts said.

"The yen has obviously benefited ... from risk aversion," said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston.

"The big psychological impact was from the 10.2 percent unemployment rate. It's going to cast further doubt on whether the incipient U.S. economic recovery can be sustained without further government support," he added.

The dollar fell as low as 89.62 yen, according to Reuters data, and last traded 1 percent lower at 89.85 yen JPY=. The euro declined 1.2 percent to 133.45 yen EURJPY=R, after hitting a session low of 133.22 yen.

Analysts said the dollar also came under pressure against the yen as two-year U.S. Treasury yields eased after the jobs data. The two-year notes are most sensitive to potential changes in the Federal Reserve's monetary policy.

The prospects of prolonged, low U.S. interest rates have fueled speculation the greenback is replacing the yen as a primary funding currency in carry trades. In such trades, investors borrow in low-yielding currencies and reinvest the proceeds in currencies and assets with greater returns.

"Dollar/yen has essentially become an interest rate play," said Paresh Upadhyaya, portfolio manager at Putnam Investments in Boston. "With interest-rate differentials narrowing further against the dollar, you're seeing dollar/yen under pressure."

WORST OF BOTH WORLDS

The dollar initially rose after the jobs data on safe-haven demand, but pared gains on reduced expectations the Fed -- the U.S. central bank -- would tighten its ultra-loose monetary policy soon.