The dollar struggled near a 3 1/2-month low versus a currency basket on Friday as investors braced for U.S. data expected to show a fall in jobs for a second month, underlining the fragility of the labor market.

Currencies were generally little changed as traders steered clear of big positions before the much-anticipated data, leaving the dollar stranded close to a three-month low against the euro and an eight-month trough versus the yen hit earlier this week.

An unexpected rise in weekly U.S. jobless claims on Thursday fueled speculation that payrolls may be weak, and analysts said dollar risks were skewed to the downside as Friday's data was expected to show the economic recovery was losing steam.

We expect a number slightly better than consensus, but it's questionable whether this will help the dollar as interest rates are so low and we have a divergence of softer U.S. economic data and stronger European data, said Marcus Hettinger, global currency strategist at Credit Suisse in Zurich.

Forecasts are for a loss of 65,000 jobs in July. Data on Thursday showed new claims for jobless benefits rose by 19,000 last week, although these figures will have no bearing on Friday's data.

Hettinger said dollar weakness would continue in the run-up to the Federal Reserve's policy meeting next week, as a spate of weak economic data has strengthened the argument the central bank may have to offer further stimulus to boost the economy.

Some analysts said they would be watching the private payrolls growth component as leading data has been consistent with a moderate rise.

If that growth averages around 100,000, around where it has been at in the first half, analysts at Mitsubishi UFJ said the Fed is unlikely to alter its growth outlook and, ultimately, its monetary policy stance to keep rates low for now.

In those circumstances, today's NFP report could prove supportive for the dollar as it should help pare near-term Fed monetary easing expectations, they said in a note.

Speculation the Fed may buy more bonds to support the economy drove the two-year Treasury yield to a record low this week. Some say this has dimmed the appeal of short-term U.S. debt among overseas investors, knocking the dollar.

By 5:26 a.m. EDT, the euro was flat on the day at $1.3180, but hovered in range of $1.3262 hit earlier this week, its strongest since early May. The single currency was parked just below $1.3200 options due to expire later in the day.

Technical analysts cited near-term resistance at $1.3265/1.3280, lows hit in March and April, while support was seen at $1.3125, the 38.2 percent Fibonacci retracement of the euro's fall from November 2009-June 2010. The single currency has been hovering above this level for the past week.

Some analysts said the euro had room to gain if German industrial output data due this morning come in strong. A string of solid German numbers has supported the view that the euro zone economy is improving faster than the U.S.


The dollar index .DXY was flat at 80.849 hovering near 80.469 hit on Monday, its lowest since April. While it held near its 200-day moving average at 80.792 on Friday, a weekly close below that may spell more losses for the dollar, analysts say.

Against the yen, the dollar rose 0.2 percent to 86.00 yen, treading above 85.32 yen hit on Wednesday and where technical analysts saw some support. A fall under that level would mark the dollar's weakest since November 2009.

Traders said a sizable volume of knockout option positions below 85 yen suggested that the dollar's fall could become more volatile if it does step into those price levels.

A breach of 85.00 yen is seen cranking up rhetoric by Japanese authorities that the yen is too strong, but many market players think Tokyo is unlikely to pull the trigger at this time.

(Editing by David Brough)