Dollar heads for biggest weekly drop since April as jobs data dims Fed hike bets

By Samuel Indyk and Jiaxing Li

LONDON, July 3 (Reuters) - The U.S. dollar fell towards its biggest weekly loss in 12 weeks on Friday after a tepid U.S. jobs report cooled market expectations for a near-term Federal Reserve interest rate hike, providing some relief for the embattled Japanese yen. 

Broad dollar weakness lifted the euro to near a two-week high at $1.1472, up 0.6% on the week, while sterling firmed to $1.3380 for a 1.2% weekly gain, its best in nearly three months. 

That also offered some respite for the Japanese yen, pushing it back above 161 per dollar, but markets remained nervous about intervention risks after a sudden jump on Thursday lifted the currency from a 40-year low of 162.84. 

U.S. JOBS GROWTH SLOWS

The dollar took a hit after U.S. job growth slowed sharply in June and payroll gains for the prior two months were revised lower, prompting traders to pare bets on a near-term Fed rate rise.

Markets are now pricing in about a 35% chance for a hike at the September meeting, according to LSEG data, down from 55% prior to the data. U.S. Treasury yields also pulled back from earlier highs, with those on interest rate sensitive 2-year notes snapping a three-day streak of gains with a 4 basis-point drop. 

"We don't have a hike in our forecast, so this was in line with our views that we would get a turnaround here eventually and a weaker dollar," said Karl Steiner, head of analysis at SEB. "I wouldn't be surprised if we see some more downside." 

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was roughly 0.3% lower at 100.68 after a 0.5% dip on Thursday. It is now down 0.7% for the week, the biggest weekly drop since early April. 

YEN INTERVENTION FEARS LINGER 

Although the yen has clawed back from 40-year lows, investors remained on high alert for possible intervention during a holiday-thinned session with U.S. markets closed for Independence Day. 

"You have to have it on the radar," said SEB's Steiner, referring to the possibility of intervention. "Historically they have preferred to do it whenever there is lower liquidity." 

Japan issued a fresh warning to currency markets on Friday as Finance Minister Satsuki Katayama said Tokyo was in regular contact with Washington on foreign exchange issues and remained ready to support the yen. Japan's Chief Cabinet Secretary Minoru Kihara said they were closely monitoring market movements with a high sense of urgency. 

Markets are concerned about Japanese officials abandoning their habit of telegraphing risks, instead signalling a more targeted campaign to squeeze speculators and raise the cost of betting against the battered yen.    

"The bigger question is what comes next," said Tony Sycamore, an analyst at IG, pointing to the 162.83 level as a short-term top for dollar-yen.

"Whether it becomes a more meaningful medium-term high will ultimately depend on incoming U.S. data and, to some degree, developments in the Japanese government bond market."

(Reporting by Samuel Indyk and Jiaxing Li; Editing by Kevin Buckland, Jamie Freed and Alex Richardson)