FOREX-Dollar falls vs euro, higher-yielding currencies

* Risk appetite increases; yen, Swiss franc under pressure

* U.S. payrolls fall less than expected in August

* U.S. service sector activity slows in August

(Updates prices)

By Aleksandra Michalska

NEW YORK, Sept 3 (Reuters) - The U.S. dollar fell against most foreign currencies on Friday after a surprisingly strong non-farm payroll report eased worries about the outlook for the economy and boosted appetite for riskier assets.

The safe-haven yen and Swiss franc weakened broadly, while higher-yielding currencies such as the Australian dollar gained as expectations grew the U.S. labor market may not be as bad as many had feared.

U.S. non-farm payrolls fell 54,000, the Labor Department said, a much smaller drop than expectations for a decline of 100,000. Private employment, considered a better gauge of labor market health, increased 67,000. For details, see [ID:nN02227856]

“Today’s employment number was encouraging,” said Kevin Chau, FX strategist at IDEAglobal in New York. “But I think the market is still looking for more signs that we are not heading towards double dip.”

Optimism about the economy, faded slightly after separate data showed the U.S. non-manufacturing sector grew at a slower-than-expected pace in August and that the sector’s employment shrank that month.

The ICE Futures U.S. dollar index .DXY, which tracks the greenback versus a basket of six currencies, last fell 0.5 percent to 82.022.

Stephen Butler, director of forex trading at Scotia Capital in Toronto, expects further dollar weakness in the near term as risk appetite stays supported.

The euro traded at $1.2891 EUR=, up 0.5 percent. It also gained 0.6 percent to 108.77 yen EURJPY=.

While the jobs report might mitigate fears of a double-dip recession, some analysts cautioned that the U.S. economy is still in for a slow recovery.

“Just as trading on the bad U.S. data recently was overdone, I think sentiment on this week’s positive reports is also going to be overdone,” said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York. “You have a lot of people unemployed, so it’s a long way back to normal.”

The dollar earlier rallied more than 1 percent to a session high of 85.22 yen after the jobs data JPY=, according to Reuters data. It pared most gains after the weaker-than-expected ISM services data and last traded up 0.1 percent at 84.40 yen.

The dollar hit a 15-year low of 83.58 yen on electronic trading platform EBS late last month on fears the U.S. economic recovery was stalling.

IDEAglobal’s Chau said the dollar/yen may still try to dip below 80 and traders will likely continue to pay close attention to the risk of currency intervention by Japanese authorities to weaken the yen.

The euro rose to 0.9 percent to 1.3112 against the Swiss franc EURCHF=, coming off from an all-time low around 1.2850 earlier this week. The dollar was up 0.4 percent at 1.0169 francs CHF=.

An increase in risk appetite lifted commodity currencies. The Australian dollar hit about four-week highs against the dollar to US$0.9164 AUD=, while the New Zealand dollar rose to a more than three-week high at US$0.7204 NZD=. The Canadian dollar advanced to a two-week high, with the greenback falling 1.4 percent to last trade C$1.0384 CAD=. (Additional reporting by Nick Olivari and Steven C. Johnson; Editing by Andrew Hay)