* Euro dip below support may signal more dollar gains
* Longer-term outlook may still favor euro
* Dollar up vs yen, Swiss franc as U.S. yields rise (Updates prices, adds detail, comment, changes byline)
By Wanfeng Zhou
NEW YORK, Feb 4 (Reuters) - The dollar rose against the euro on Friday after the U.S. jobless rate fell to its lowest level in nearly two years, and traders said a brightening U.S. economic outlook may help it extend gains in the weeks ahead.
The euro fell as low as $1.3543 on trading platform EBS, and traders said a break through firm support at $1.3570 suggested a three-week euro rally may be showing signs of exhaustion.
“Overall, we think the euro’s move was overdone and the retracement we’ve seen in the second part of this week should probably continue into early next week,” said John Doyle, strategist at Tempus Consulting in Washington.
The euro was last 0.4 percent lower at $1.3577 EUR=, headed for its first three-day decline in a month. The next key downside target is around $1.3527, the 100-day moving average on EBS.
The euro peaked this week at $1.3862, the highest in nearly three months, but slid after the European Central Bank cooled expectations for a near-term hike in euro zone interest rates.
BNP Paribas technical strategist Andrew Chaveriat, adding the euro could test $1.35 in coming days and $1.3250-$1.3350 over the next few weeks.
Recent U.S. data, capped by the jobless rate’s slide to 9 percent from 9.4 percent, pushed up U.S. yields and had markets pricing in a two-in-three chance of a U.S. rate hike by year end, up from one in three a week ago.
For more see [ID:nN0366997] and [FEDWATCH].
“Yields are moving up, and while job creation is not where people want it to be, the feeling is there is an underlying momentum,” said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey. “The dollar has moved higher on that.”
Trading on electronic trading platform EBS posted an unofficial volume record with 2,990 foreign exchange trades recorded in the minute after the release of the jobs data. Some 12,000 deals were recorded in the 10 minutes after the release. Records become official 24 hours after they’re set.
After hitting a four-month low beneath $1.29 on Jan. 10, the euro had climbed nearly 8 percent by mid-week, partly on the view the ECB would lift interest rates before the Fed.
ECB President Jean-Claude Trichet dashed those expectations on Thursday, saying euro zone inflation expectations remains well anchored. [ID:nLDE7120I5]
The Federal Reserve, however, has also remained dovish, and Chairman Ben Bernanke reiterated this week that the economy remained fragile. [ID:nWAL3DE7Z2]
Despite recent stronger-than-expected data on U.S. factory and service sector activity, some analysts say the market may be getting ahead of itself. Dan Cook, senior analyst at IG Markets in Chicago, noted U.S. employers added a paltry 36,000 jobs in January, though bad weather may have had an impact.
“These numbers are not supportive of the dollar,” he said. “They mean the Fed is going to stay around. Look for some profit-taking.”
Traders from one large investment bank reported only modest selling of bullish euro-dollar and euro-yen option structures on Friday, suggesting the longer-term view remains bullish.
Investors have grown less anxious about Europe’s ability to handle a sovereign debt crisis, and EU policymakers on Friday discussed bolstering a rescue fund for indebted member countries. [ID:nLDE7131VO]
In a note to clients, Dan Dorrow, head of research at Stamford, Connecticut-based FX execution firm Faros Trading, said central bank efforts to rebalance dollar-heavy portfolios will ensure a large and reliable bid for the euro. (Additional reporting by Gertrude Chavez-Dreyfuss and Nick Olivari and Steven C. Johnson; Editing by Diane Craft)