The dollar rebounded from an eight-month low against the yen on Wednesday and rose against the euro as encouraging U.S. employment and service sector data prompted traders to unwind bets against the U.S. currency.

But the deck still appeared stacked against the dollar, which has shed some 6 percent against major currencies since July. Wednesday's report showing the U.S. economy added 42,000 private sector jobs last month was welcome, but traders said it would take far more good news to reverse the prevailing bias against the greenback.

The market is still short the dollar, so you could see some covering between now and the end of the week, but this would be for the short term, said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York, adding:

Because it's obvious the pace of U.S. growth is slowing and people are waiting to sell the dollar at better levels.

For now the dollar was enjoying a rare rally. It was last at 86.26 yen, up 0.6 percent after falling to 85.33, its lowest since November. A move below 84.81 yen would mark a 15-year low.

The euro fell 0.6 percent to $1.3146, off Tuesday's three-month high of $1.3261. Data showing the U.S. services sector grew more than expected in July also helped the dollar.

The U.S. dollar is finding its legs this morning on the heels of better-than-expected labor market numbers, said Kathy Lien, director of research at GFT Forex in New York.

However, she noted that the dollar remains perilously close to that 15-year trough against the yen below 85 and said markets are still worried that recent signs of weaker U.S. growth could prompt the Federal Reserve to embrace more monetary policy easing.

Those fears have been driving U.S. short-dated Treasury yields lower in recent days, and that has undermined the appeal of dollars for global investors.

Technical factors are still flashing some warning signals. Strategists point to an index of the dollar against six major currencies .DXY, which has closed for two straight days beneath its 200-day moving average before rising 0.6 percent on Wednesday.

Lien said a strong showing from the government's more comprehensive payrolls report on Friday could cause yields to finally stop falling, which is a prerequisite for the U.S. dollar to bottom.

Economists polled by Reuters are looking for Friday's data to show an overall decline of 65,000 jobs in July but a 90,000 gain in private sector employment.

Yanagihara said, however, that jobs are a lagging indicator and signs of sluggish growth will keep investors cautious.

Speculation that the Fed -- the U.S. central bank -- could opt to revive a program to buy Treasury and mortgage debt to boost growth is also likely to cap dollar gains, analyst said.

We see further dollar weakness ahead, with the Fed making it clear its priority is to support growth, said Ulrich Leuchtmann, currency analyst at Commerzbank in Europe.

(Additional reporting by Nick Olivari in New York and Neal Armstrong in London; Editing by James Dalgleish)

Versus