* Dollar higher before closely watched U.S. jobs report
* Euro headed for worst run of weekly losses in eight months
* Investors grow more tolerant of risk
By Jemima Kelly
LONDON, Oct 2 (Reuters) - The dollar edged higher on Friday, as investors eyed a U.S. employment report that may bolster expectations the Federal Reserve will raise U.S. interest rates this year for the first time in almost a decade.
The dollar fell sharply two weeks ago after the Fed once again kept rates at their historic lows. But it has since gained around 2.5 percent against a basket of major currencies, as Fed Chair Janet Yellen and other U.S. policymakers have kept alive the prospect of an increase later this year.
On Friday, the dollar index was up 0.2 percent on the day, in a subdued market before the U.S. non-farm payrolls numbers due at 1230 GMT. Economists expect employers added 203,000 jobs in September, according to a Reuters poll.
“A good number is unlikely to support the U.S. dollar very much, because everybody knows the labour market is doing well,” said Commerzbank FX strategist Esther Reichelt in Frankfurt.
“On the other hand, if we have a very disappointing number, the effect for the U.S. dollar might be much stronger because everybody knows that for the Fed to hike, everything must fit. So any disappointment is likely to change the sentiment within the FOMC members against hiking, or at least to spur further doubt, and this will be reflected in a weaker U.S. dollar.”
The euro was down 0.3 percent at $1.1160, leaving it on track for a third straight week of losses against the dollar, its worst run in eight months. Bets the European Central Bank will expand its 1 trillon-euro bond-buying programme and a renewed appetite for risk have pulled it down.
The euro has benefited in recent months during periods of risk aversion, as investors who had held euro-funded positions on riskier but higher-yielding currencies have unwound those so-called carry trades by buying back euros.
Now markets are shifting back towards risk, if only temporarily, said Ian Stannard, Morgan Stanley’s European head of G10 FX strategy in London. The latest data from China - worries about which have driven much of the risk aversion in recent months - was not as bad as some had expected.
“We think there is a potential for a short-term but tradable risk rebound to take place ... so we’ve turned quite positive on some of the currencies that have been under the most pressure recently,” Stannard said, citing the Australian and Canadian dollars.
“That means we think the euro will come under some renewed pressure as well.” (Reporting By Jemima Kelly, editing by Larry King)