FOREX-Dollar falls as US jobless rate shoots up

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* U.S. jobless rate rises to 5.5 percent in May

* Non-farm payroll job losses total 49,000

NEW YORK, June 6 (Reuters) - The dollar dropped across the board on Friday, after data showed the U.S. economy lost jobs for a fifth straight month and the unemployment rate shot up to its highest in more than 3-1/2 years.

The Labor Department report pared back expectations that the Federal Reserve will raise U.S. interest rates this year as it grapples with the threat that the U.S. economy could still slide into recession.

That should undermine the dollar’s prospects, which have recently dimmed in the wake of comments from European Central Bank President Jean-Claude Trichet, who said the bank may hike interest rates next month to stem growing inflationary pressures.

“The focus is on the unemployment rate, as it’s obviously starting to catch up with the softening in the payrolls figures. We haven’t seen that until now, so it looks like it’s a bit of catch-up here, and that’s what the market is reacting to,” said Shaun Osborne, chief currency strategist at TD Securities in Toronto.

The euro EUR= gained versus the dollar to $1.5673, up 0.6 percent from $1.5590 before the data. Against the yen JPY=, the dollar fell to 105.82 yen from 106.30 yen.

The interest rate futures market expects the Fed to hold benchmark interest rates steady this month, while chances for a rate hike by October fell to about 56 percent from as high as 82 percent earlier.

The unemployment rate rose to 5.5 percent last month from 5.0 percent in April and was the highest since October 2004, the report said.

U.S. non-farm payroll job losses last month were 49,000, a little better than expected. Markets had predicted that the economy would shed 58,000 jobs for May.

“This (dollar fall) is more of a knee-jerk reaction and things will settle down, but the short-term trend still favors a weaker U.S. dollar,” said George Davis, chief technical strategist at RBC Capital Markets in Toronto. (Additional reporting by Nick Olivari and Steven C. Johnson; Editing by Kenneth Barry)